What can R&D Tax Credits do for an innovation business?
For many startup founders, success will be determined by how well you can manage and maintain cash flow in those early years. While raising investment and applying for grants often dominates discussions around funding, one of the most valuable and under-utilised sources of funding can come from tapping into R&D tax credits.
For innovative startups developing new products, software, processes or technologies, R&D tax relief can provide a substantial cash injection that helps extend runway, hire talent and accelerate growth. Yet in our experience, we still find that many founders either misunderstand the scheme or assume they do not qualify.
We’ve compiled some FAQ’s around R&D Tax Credits. Here is what every startup founder needs to know.
When do I notify HMRC? Why timing is important.
It is important that you inform HMRC if you are planning on making a claim for the first time which you do by filing an Advanced Notification Form. Companies have six months from the end of their accounting period to notify HMRC of their intention to claim. Failure to do so will prevent the company from being able to make a claim for the period.
Notification should only be a one-time requirement although you may need to re-notify if you cease to make a claim for three years.
What can I do to make claim scrutiny a less painful? Robust record-keeping processes.
As HMRC has increased scrutiny of claims, robust documentation has become increasingly important.
It is vital that you keep clear and detailed records of the R&D activities you have undertaken, the staff involved and the costs you have incurred in doing so. This is even more important if you are looking to claim on more than one project.
In our experience, HMRC love a good Gantt chart and these can be an excellent way of recording how your R&D project is progressing.
Rather than attempting to recreate evidence months after project completion, we would recommend establishing processes at the outset to capture information throughout the development lifecycle.
What costs are eligible as R&D for Tax Relief?
Qualifying costs must fall within one of the following categories:
- Staff costs (salaries, Employers NI, and Employers pension contributions)
- Consumables (including utilities if separately identifiable)
- Externally provided workers
- Subcontracted R&D activities
- Cloud computing costs
- Data licensing costs
Can I claim for subcontractor costs? Mainly yes, but not always.
For many startups, employee salaries represent the largest qualifying expenditure although projects requiring specialist knowledge and processes can lead to large subcontractor spends.
Overseas restrictions introduced for accounting periods commending on or after 1 April 2024 can severely impact what subcontractor or externally provided worker costs you can include unless you can demonstrate that the conditions required to undertake the R&D activities do not exist in the UK.
Whilst it may be more cost effective to use an overseas subcontractor you should factor in the availability of R&D tax relief on these costs as part of your decision making.
Will I get the relief straight away? You may have to wait.
R&D tax relief is claimed within the company’s corporation tax return which means that you will have to wait until your accounting period has come to an end and your accounts have been prepared before you can submit your claim. This could mean that you are looking at more than a 20-month wait between when you initially incur the expenditure and when you can claim the relief which should be factored into cashflow forecasts
How do I get find out if my R&D Tax Credit claim will qualify? Advance Assurance is available
HMRC has introduced a targeted advance assurance service which gives eligible small or medium sized enterprises clarity on specific complex or high-risk areas of an R&D tax relief claim, before a claim is made.
The service allows you to make up to 2 applications for assurance on a specific area of R&D relief. This can include seeking confirmation on:
- whether your project meets the definition of R&D for tax purposes
- whether overseas expenditure qualifies for relief
- whether you can claim R&D relief where work has been contracted out to you by another company to undertake on their behalf
R&D tax relief could be one of the most valuable sources of non-dilutive funding available to your business – but getting it wrong, or missing key deadlines, could mean leaving significant cash on the table. If you’re building the next generation of software, life sciences, AI or deep-tech innovation in Cambridge and the East of England, now is the time to review your eligibility and ensure your claim strategy is fit for purpose.
Speak to PEM’s Business Tax team today for a no-obligation discussion. We can help you identify qualifying activities, maximise your claim and navigate HMRC’s evolving requirements with confidence, so you can focus on what matters most: growing your business.
Contact our specialists to find out how much your innovation could be worth.
