Research and Development – or R&D – tax credits are a generous incentive by the UK government to get brilliant ideas funded, delivered, and creating profit. It’s a low-risk method to reward innovation, and HMRC are currently under enormous pressure to get this money out to eligible businesses with a mere 28-day turnaround rate. As a tech founder, you know about this but are perhaps wondering exactly how it applies to you and your business. Put simply, the biggest mistake you can make when it comes to R&D tax relief is not making a claim at all. If done properly and proactively, these reliefs could have a hugely beneficial impact on your business.
The biggest mistake is not claiming R&D at all
It can sometimes feel counterintuitive or downright impossible to get money back from HMRC. You might be tempted to keep your head down, pay your taxes, and avoid any trouble. Maybe you’re doubting if what you’re doing even qualifies for this type of relief: the term “research” calls to mind scientists in lab coats, carefully measuring test tubes of chemicals. In reality, tech businesses are doing the exact type of work these reliefs are designed to benefit and, if done wisely, there’s no downside to making a claim.
If you’re uncertain about your eligibility, we have an R&D tax relief eligibility checker you can use here. Or, simply ask yourself these questions:
- Is what I’m doing hard?
- Will it result in something new or better in my industry?
- Does it require competent, skilled, and professional people to do it?
- Am I being faced with or overcoming uncertainty?
If you answered yes to the above questions, you should definitely look into filing for R&D tax relief.
Don’t pay over the odds to make a claim
If you’ve done research into R&D tax relief, you’ve likely come across the massive industry that’s been created off the back of it. There are firms that boast 100% success rates on all claims filed while simultaneously drumming up fear and uncertainty. The messaging is: if you don’t pay us, you’re going to fail.
The fact is, there is no persuasion involved in applying for R&D tax relief. You either qualify, or you don’t. Some industries will require a degree of specialisation, but as a tech founder, the qualities of an R&D-eligible business are at the very core of what you do: you’re innovative, you’re hard-working, and you’re disruptive. You don’t need specialist consultancies to make these claims, and thus you don’t need to pay exorbitant rates to a company with a vested interest.
R&D relief can impact your day to day decision making
Another reason to avoid these specialist firms, beyond unnecessary pricing, is because they behave reactively rather than proactively. They function by looking at the past one or two years of your business and putting together a 40-page technical report in order to justify their fees. They’ll say this is how they maximise your claim, but truly maximising a claim can’t be done by looking to the past. It’s done by looking into the future and letting this guide your decisions in the present.
Designing your startup around R&D tax credits can impact a number of the ways you run your business day-to-day, including:
- Salaries: a common piece of advice given to the founder of a company is to put yourself on a small salary and pay the rest in dividends. But if you’re not yet making a profit, dividends aren’t an option, and you can be left feeling cash-starved. Factoring in tax relief can drastically affect what you’re able to pay yourself. What if you knew more than 30% of your salary could come back to the business in R&D tax relief? What could you pay yourself then?
- Hiring: we often see tech founders who prefer hiring subcontractors to full-time employees. You still get their expertise but at a lower cost and with greater flexibility. But usually, only a maximum of 65% of a subcontractor’s cost can’t be included in your R&D tax claims, whereas a full-time employee can be included up to 100%.
- Accounts: If your business is not yet profitable, your R&D claims would be paid directly to your bank at a slightly reduced rate. Once you become profitable, these claims would instead reduce your corporation tax liability. If you’re on the cusp of being profitability though, you can lose out more heavily by claiming the cash. With the right planning, bring forward certain costs to maximize your claim one last time before becoming profitable.
- Funding: Certain lenders are willing to lend money in advance of you receiving your R&D payment. Having this option in your back pocket could impact your standing as you go into a funding round. It’s not cheap, and it’s not always recommended, but it could be used simply as a means to pitch more confidently when it comes time to secure funding for your business.
Make the best decisions for your business by seeing the whole picture
All of the above-mentioned tactics are incredibly nuanced and dependent on the specifics of you, your business, and your goals. The high-price, low reward firms we discussed earlier won’t be taking the time to understand the full scope of your business. They’ll help make your claim as promised, but they won’t provide any guidance on the steps you can take today to maximise your claims in the future.
This is why we recommend seeking guidance from an accountant who understands the full picture of your startup and the interplay of R&D, Grants and business decisions. We can help you choose between subcontractors and full-time employees. We’ll crunch the numbers so you get the best salary as a founder without impacting your business. And we can forecast future financial opportunities so you don’t miss out.
If you’re curious to see how R&D tax relief could change your business, start with our eligibility checker.