What are R&D tax credits and how do I maximise them?

You should probably forget everything you thought you knew about R&D tax credits. 

Sounds like an extreme statement to start an article, but as a B2B tech founder, it’s likely you’ve invested time and money into R&D already and, as a result, have explored your eligibility for R&D tax relief. Unfortunately, there’s a lot of advice out there telling you that practically everything… blueberry muffin recipes and beyond… is research and development. 

 Three key points I want you to take away from this post:

1. There’s a big difference between the everyday business understanding of R&D and R&D for tax purposes. 
2. HMRC are taking a much more active approach to enquiries nowadays, and you can fall prey to penalties if there are errors in your claim.
3. You want (and need) an adviser who can bring both tax and technological expertise to your case. 

Let’s get into it.

What we’re looking for is an advance in a particular field of science or technology 

“It’s definitely R&D”.

This is one of several major problems with the R&D tax credits scheme. 

We work with lots of pre-revenue, innovative startups. What are they primarily focused on? Research and Development. When we ask how much of their cost is focused on R&D, it’ll be something like 80% to 100%. As advisers, we’re faced with walking back that expectation. 

Many conversations with clients have to address the fact that, yes, they are doing R&D…but we’re not looking for R&D in a business sense, we’re looking for ‘R&D for tax purposes’.

In reality, their ‘Research and Development for tax purposes’ may be nothing at all. Maybe what they’re building is a commercially innovative product or service that uses existing technology. They still research and develop it, but alas, no tax credits. 

When we talk about R&D for tax purposes, we’re not looking for something that is simply commercially new. 

It’s not enough to be building the ‘Uber of Dog Grooming’.

And even where there is such an advance, only a few cost categories count.

• Rent for your research facility? Nope.
• Recruitment fee for your CTO? Nope.
• Dog biscuits? Possibly under Consumables :) 

Really, it should be the ‘Science or Technology Advancement Tax Credit Scheme’. But ‘R&D’ is less of a mouthful. 

Choose an advisor who will understand the full scope of your business to determine if and how HMRC’s definition of R&D applies to you

If you’ve researched 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 claiming R&D tax relief, it’s a self-assessment and those 100% success claims are disingenuous (to put it mildly). 

Exercise caution! If a firm’s promise sounds too good to be true – it probably is. Eligibility criteria has been quite vague up until this point, and there will be ethically-challenged firms who will take advantage of the grey areas to line their pockets. 

What should a good, ethical adviser do?

To advise whether (and how) your project qualifies, a good adviser will need to judge:

• Whether an advance has been made in a particular field of science or tech, measured against existing technologies.
• Whether that advance is non-trivial in the eyes of someone with industry/subject matter expertise.
• Whether the scientific or technological challenges involved meet HMRC’s definition of ‘technological uncertainty.’

In order to do that, the right adviser will need to bring to the table:

• Tax and compliance expertise – an ability to interpret the rules of the scheme and help you understand them. 
• Technological expertise – with the backup of scientists, engineers and technologists that can speak to the counterpart of the client and understand what has been undertaken.
• The ability to combine these specialisms to create a case study narrative that proves compliance with the scheme, that a HMRC caseworker can read and understand. 

A good adviser will also be looking proactively, not reactively to maximise a claim

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 relief 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 30% of your salary could come back to you in R&D tax relief? What could you pay yourself then?

• Hiring: we often see tech owners who prefer hiring subcontractors to full time employees. You still get their expertise but at a lower cost and with greater flexibility. But you can only claim 65% of  subcontractors in your R&D claims, and if they are on the wrong type of contract it can be nil, whereas a full-time employee can be included at near to 100%.

• Accounts: If your business is not yet profitable, your R&D claims would be paid directly to your bank account. Once you become profitable, these claims would instead reduce your corporation tax liability.  If you’re on the cusp of being profitable, you may decide having cash in hand is more important than reducing tax. By increasing your costs in the current tax year, you could maximise your claim one last time before becoming profitable.

• Funding: Certain investors 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. 

All of the above mentioned tactics are incredibly nuanced, and dependent on the specifics of you, your business, and your goals. This is why we recommend seeking guidance from an accountant who understands the full picture of your startup.

HMRC are clamping down on R&D scheme abuse by checking more claims

A slack approach to R&D relief left the door open for lots of overinflated claims for tech projects. In an effort to correct that, HMRC are taking a much more active approach. Though there has been potential for randomised sampling, it’s likely that the catalyst for a HMRC enquiry will come from mistakes made in the claim. 

It goes without saying – the most ideal scenario is no mistakes!

R&D compliance is complex stuff. Which is why we’re so passionate about making sure you get the right advice and support from the get-go. The last thing you want in pursuit of a financial opportunity is to end up with a financial penalty. 

Get in touch with us to discuss your project and talk eligibility.