R&D Tax Credits Explained-Part II

This is the second in a series of guest posts by Daniel Tenner of GrantTree. The first article is here.

What kinds of startups can claim R&D Tax Credits?

A common misconception of R&D Tax Credits, one often spread by accountants (who cannot be expected to be experts in technology as well as the sophisticated juggling of tax and management numbers), is that tax credits are only for the kinds of companies where people wear lab coats and work with test tubes, wind tunnels and other advanced technical tools.

However, the reality is that the scheme is quite broad and includes, for example, software development. Not all the activities that fall under that heading are “qualifying under the scheme”, as the jargon goes, but a lot of them are. Developing a software product that is mostly content-based, for example, doesn’t typically qualify. On the other hand, the kind of product that startups build, which involves issues of scalability, performance, integration, algorithmic developments, and of course technical innovation, tends to qualify.

The other point worth making is that not all of a company’s activity has to qualify for that company to file for R&D Tax Credits. In fact, it is almost impossible for all of a company’s work to qualify. So long as some of the work is complex and challenging, there’s a good chance that a portion or even a majority of the costs will qualify.

What is “complex and challenging”? Well, the answer to that is “it depends”. You can find much more detail here, but as a rule of thumb, if it was not entirely obvious to a moderately competent programmer (i.e. not John Carmack, but not an inexperienced programmer either), what the solution would look like, in detail, before it was programmed, then it probably qualifies.

Most tech startups that we’ve encountered tend to qualify. However, to be sure, just give a specialist company a ring, and all of them will “qualify” you for free. It will only cost a bit of time with a technical person who can talk about the product that the startup is building, and you should be able to get a clear answer, without having to commit to anything.

There’s one more important “qualification criteria” that many startups fail, and it’s a fairly mundane one. R&D Tax Credits work by “enhancing”, for tax purposes, the amount of money spent on “qualifying R&D”. This means that in order to get money out of R&D Tax Credits, first you need to have spent money. Many bootstrapped startups spend little to no money until much later, and so tax credits are rarely worth the hassle of filing for them.

However, with up to 25% of the money recoverable, the maths is simple. If 25% of your R&D spend would make a tangible difference to your startup and be worth spending time and attention on, then tax credits are a no-brainer.

Coming up n Part III: how to file R&D tax credits.

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