“Being aware of tax credits can make a dramatic difference to your bottom line.” – Tax Tips
Start-up businesses are often unaware that they are some of the best candidates when it comes to claiming Research & Development tax relief, there were over 407,505 start-up businesses in 2020 but only 80% of companies eligible for the scheme were aware that they could make a claim. When a business first emerges, they are often conducting lots of research and innovation while being on the constant lookout for funding options.
The scheme was introduced to encourage growth and innovation, ranging from overcoming scientific or technological challenges, improving existing services/products or creating new ones. The tax incentive is open to all industries as long as they can prove that they have carried out R&D activities; the scheme itself allows businesses to claim back as much as 33p for every £1 spent in R&D practices as long as a technical or scientific uncertainty is addressed, and money has been spent on the service.
So why aren’t start-up businesses claiming the scheme?
1) “I do not think that my work is laboratory orientated.”
The largest misconception about Research and Development is that it is only scientists who qualify when that is not the case. When it is mentioned to business owners, they often think of a large laboratory filled with scientists in white lab coats, but this could not be further from the truth. R&D Tax Credits can be claimed for businesses in every industry, from Hospitality to Agriculture, to see a list of some of the main industries click here. Activity that is classed as R&D also does not have to consist of creating ground-breaking new technology or services, but it can be as simple as an activity linked to discovering and enabling the development of new products, services and processes.
2) “I have already had grants and funding.”
A lot of businesses believe that because they have received other forms of funding, that they cannot claim R&D Tax Relief, but, again this is not the case. A lot of businesses may claim funding to help with their R&D projects, which will assist you in winning an R&D Claim. The amount that a business can claim may be slightly lower if they have already received some funding, but it is still possible, although determining whether it will be worth putting in a claim will depend on how much the business has already claimed. Another misconception about R&D Tax Credits among start-up businesses is that if they have taken advantage of Covid-19 relief schemes that they will be ineligible for R&D tax credits, even though this is not true.
3) “I do not have enough eligible costs.”
Eligible costs include staff costs, external workers, consumables, software and subcontractors, so it makes the process of getting a claim more likely if these are areas that a business can prove they have spent money on. Wages are typically the biggest component of credit calculation, supplies and contracted costs are also eligible, but if a company does not have any employees it is still possible to gain benefits from the scheme. This is possible by taking the R&D credit as a payroll tax offset, the credit can then be carried to the next quarterly return and will be available until it can be fully used against payroll tax. Start-ups may often think that they do not have any of the eligible costs when in reality they do, it is just not as clear as they imagined it to be.
4) “I don’t know how to make a claim.”
Submitting an R&D Tax Credits claim can be a difficult and lengthy process which puts a lot of business owners off, to build the claim you will need to provide proof that you have carried out activities that are qualifying for the scheme, the expenditure spent on these activities and a completed CT600, a technical narrative explaining reasons for the project will also have to be created and compiled. Most business owners prefer to use an Expert to help them process the claim, and to take control of the entire process making it easier and less stressful. To find out how we can help you submit a claim, click here.
5) “I am making losses.”
Another widespread misunderstanding about R&D tax credits is that if a business is making losses they will not be eligible to claim. Loss-making companies can still make a claim and receive cash back from HMRC, an example of this is that if a start-up has a Surrenderable Loss, it can surrender the R&D Tax Relief in exchange for a tax credit of up to 14.5% of the surrendered amount, the process may be slightly more complicated for a loss-making business but it can be a great helping hand.
6) “I have already filed their taxes for the year”
R&D Tax Credits can be claimed for up to 2 years prior to the claim, so although it would be too late to claim the credit as a payroll tax offset, companies can amend their returns to monetize it as an income tax credit.
There are lots of discouraging misconceptions about R&D Tax Credits, but they can be very beneficial to numerous types of businesses, especially start-ups. To learn more about how Green Jellyfish can help you and your business with submitting an R&D claim or even to check if you are eligible, click here.