R&D Tax Credits Explained

This is a guest post by Daniel Tenner of GrantTree.

Foreword by Julian Carter, M.D, EC1 Capital.

"Having successfully applied for R&D Tax credits in previous startups it is a 'no brainer', you actually get cash back in the form of a cheque, essential to any startup. However to avoid being tripped up, you need to plan ahead and have the necessary documentation and records to ensure a successful outcome."

Julian Carter

Despite the large scope of the R&D Tax Credits Scheme, with many tens of thousands of companies eligible, a lot of people that we approach don’t know about R&D tax credits, or have been misinformed about them.

The R&D Tax Credits scheme, whose full name is “Science and Technology Research and Development Tax Credits”, is a tax break that the government has had in place for over 10 years (though the rules are constantly evolving). The objective is to use tax incentives to encourage technical firms to invest in developing their own innovative products, and make the UK more competitive on the global scene.

The thinking behind this is that most of the UK’s economic advantage and growth is likely to come from its ability to deliver technological innovation, and the theory is that proper tax incentives can help encourage more investment in this critical kind of innovation.

R&D Tax Credits work by reducing your taxable profit (perhaps all the way into a tax loss) and thereby dropping your Corporation Tax. However, even if you don’t owe any Corporation Tax (or don’t owe much), the scheme can still provide you with cash in exchange for “surrendering” some of the tax loss that has been created. In other words, R&D Tax Credits can help whether you’re profitable or not.

How much can you get? Up to about 25% of your “qualifying costs” can be recovered. That can make a real difference to cash-strapped startups - and just as much difference to funded startups that are spending a lot of money on developing innovative products.

There is one disadvantage to the shape of the scheme. Because it is a tax break, it is only useable after you have finished at least one accounting year. However, there’s a trick that you can use even there: although you are only allowed to lengthen your accounting year once every five years, you can shorten it as many times as you want. Some of our clients have opted to use this trick to get the tax credits early. If you have 12 months of runway, it makes a lot of sense to shorten your year to 7 or 8 months so that you get a helpful cash injection in the 10th or 11th month, allowing you to extend your runway by a couple of months just as you’re about to run out.

The next article in the series will cover what kinds of startups can claim R&D Tax Credits.

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