R&D Startup Tax Relief

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Start-Up Guide to Claiming R&D Tax Credits

As most founders know - including those who have raised Venture Capital funding - cash or runway management is tough. The impact an additional 25-35% of your capital could make on the success of your business could make or break a start-up.

In the UK, most (if not all) software start-ups are eligible for a government backed scheme which may help you claim back some money spent on development. These are called: R&D tax credits.

In this piece, we will outline what makes a start-up eligible for these credits, how to apply and anything else you may need to know.

What are R&D tax credits?

The programme was introduced in 2000 by the Government to encourage and reward Research & Development within limited companies. Research and Development (R&D) Tax Credits are a UK only tax free incentives enabling companies to reduce their tax bill or claim payable cash credits as a proportion of their R&D expenditure. Research and development tax credits offer an additional tax reduction of up to roughly 25% (or 33% if you are surrendering a loss) for every qualifying pound spent on R&D. This includes aspects of building new products as well as developing Intellectual Property.

Types of R&D relief

There are different types of R&D relief, depending on the size of your company and if the project has been subcontracted to you or not.

Small and medium sized enterprises (SME) R&D Relief

You can claim SME R&D relief if you’re a SME with:

You may need to include linked companies and partnerships when you work out if you’re a SME.

SME R&D relief allows companies to:

How to qualify?

You may think what you're doing isn't considered R&D, but the scheme is remarkably inclusive and a wide range of UK companies are eligible.

Companies in any sector can be eligible, although the most prevalent sectors where R&D is frequently undertaken include: Software development, manufacturing, engineering, construction and pharmaceuticals.

For the purpose of tax credits, the core criteria is that your company is:

1. Attempting to create an advancement in the field of science or technology.

2. Overcoming scientific or technological uncertainty in order to achieve this.

But that doesn’t necessarily mean a startup’s technology needs to be cutting edge. R&D credits are aimed at incentivising novel technical or scientific activity with commercial applications.

Which costs can you claim for?

You can claim R&D tax relief on costs that arise from the start to the end of a project’s investigative and development phase:

These costs then fall into five categories; people, subcontractors, consumables, utilities and software.

If eligible, startups can typically claim R&D tax relief for the most recent two accounting periods. For example, the claim can be made in a 2020 accounting period using costs incurred during the 2019 and 2018 period.

Costs that cannot be claimed

You cannot claim for:

How to claim tax credits?

At the top-level, to claim for R&D tax credits you put an X in box 650 and the enhanced R&D expenditure (ie 230% of the qualifying costs identified) in box 660 of your HMRC Corporation Tax return (CT600 v3),

This typically takes HMRC between four and six weeks to process a claim, although RDEC can sometimes take a little longer. Your R&D tax credit cash benefit is paid directly into your bank account.

If your business is profitable, your overall Corporation Tax bill will be reduced, or if you have already paid your bill for the period, you will receive a repayment.

If your business made a loss for the period, you will receive a R&D tax credit cash refund.