How to navigate R&D Tax Credits to ensure your start-up can take advantage of this easy to access cashflow?
Our CFO, Paul Griffiths who is a veteran at advising companies on the mythical government initiative of R&D Tax Credits. He has listed his best practical advice on how to navigate this to ensure your start-up, with a little bit of work, can take advantage of this easy to access cash flow that really can make all the difference to keeping your start-up’s growth plans moving forward.
What are R&D tax credits?
Research and Development tax credits are a UK tax incentive specifically designed to encourage companies to invest their time and £ in R&D. Companies are able to reduce their tax bill or claim cash back on a % of their approved expenditure.
We are not a Pharma company, there are no men in lab coats or test tubes in my office, surely we won't qualify?
First things first – to potentially qualify for R&D tax credits you need to be a UK company subject to Corporation Tax working in ANY field – Wine Making to Insurance to biotech all qualify, and of course you need to be spending money on qualifying projects.
So what is a qualifying project?
HMRC has purposefully made the criteria broad – whatever your size or sector if your company is attempting to ‘resolve scientific or technological uncertainties’ then your project may qualify. The project itself can be a specific piece of work or in the case of a lot of start-ups, the entire business. The criteria cover creating new products, processes or services, changing or modifying an existing product, process or service, and even, if you're not sure if your project is even possible or you don't know how to achieve it in practice you could be resolving technological uncertainness. The research doesn't have to be successful to qualify and you can include work undertaken for a client as well – very broad criteria!
So how much can I claim?
Firstly you will need to identify what expenditure is relevant to the project – broadly you can include day to day operational costs but cannot usually include capital expenditure (spend on fixed assets such as buildings etc.) so you can include:
- Staff costs (including NIC, pension etc.)
- Subcontractor costs
- Materials and consumables used in the R&D process
Once you have established what your total qualifying costs are there are some suitably complicated HMRC calculations to work out the exact amount you will receive however as a guide:
- If you are a profitable organisation then the tax credit (offset able against your corporation tax payable) should be in the region of 26% of the qualifying spend
- If you are a loss-making company then the tax credit can be taken as a cash payment from HMRC and is around 33% of the qualifying spend
So where do I start?
There are plenty of firms offering R&D tax credit services – a quick google search will get you 3.9m search results all willing to help you, for a fee, usually a % of the amount they claim for you. There is some benefit to using these firms as they can help you answer questions such as
- Show that you looked to make an advance in science and technology?
- Show that you had to overcome uncertainty?
- Explain how you tried to overcome that uncertainty?
- Show this could not easily have been solved by a professional in this field?
They will know how to get the right information from you and how to present it to HMRC for a successful claim and will generally manage the whole process for you. After a lot of research we choose: Catax
They dealt with the whole process for us and really added value to the business. They sent us plenty of friendly reminders so we kept things moving and are even forward thinking enough to accept part of their fee in CVDS our asset backed security token, a true business partner investing in the future success of their clients. Once you have filed your first years claim you can continue to file year after year for the life of your project. You can also file the claim yourself, many people do and its a reasonably straightforward process once you answer the questions and you get to keep all your claim however for a lot of SME’s (us included) they just don't have the spare capacity to manage this so outsourcing on a no win no fee type arrangement is perfect.
This all sounds too good to be true!
NO there are 10’s of ‘000s of claims from primarily SME’s claiming £ bn’s in cash and tax credits every year and you have 2 years from the end of your accounting period to file your claim (eg at the time of writing – July 19 - if your company year ended July 17 you have 1 week to get your claim in) plus you can have multiple projects running and there are even some companies who are prepared to provide loans against future R&D claims they are that secure once your initial claim is accepted, so what are you waiting for, find a business partner to work with you!!!!
About Paul Griffiths
Paul is an experienced finance and operations executive having worked alongside successful entrepreneurs including Sir Stelios Haji-Ioannou (easyJet Founder) and Brent Hoberman (Lastminute .com Co-Founder). Paul started his career in finance extending that into operations and executive management and has been involved in numerous successful IPO’s & acquisitions and also worked with numerous companies helping them to fundraise via VC, PE & more recently token sale events. Paul has started consulting and mentoring and works with the likes of Microsoft & L. Marks in their accelerators in London advising young companies in a wide variety of fields including blockchain, AI, peer 2 peer and green-tech, mentoring their executive management, working with them to grow their businesses.