How R&D Tax Credits Can Help Startups Optimise Expenses

what UK startups can claim tax credit

In today’s digital economy, growing a business and maintaining a competitive advantage comes down to innovation. Whether it’s a new technology or the disruption of an entire industry, there’s always growing pressure to build something new. 

The success of these development projects goes beyond the company and has a positive impact on the overall economy. That’s why governments continue to drive innovation through their business-focused programmes.

One such initiative to encourage innovation is the Research and Development (R&D) tax relief. For startups and small business owners, tax relief like this can help engage in expensive R&D programmes, and even encourage investment.

What’s the R&D Tax Relief?

In Britain, the R&D tax credit is designed to support and reward small businesses for investing in innovative science and technology projects. Any company hoping to engage in research and advance their field is entitled to claim this tax relief. Best of all, it can also be claimed on failed projects (and reduce the impact on the business as a whole).

Although these guidelines came into effect more than a decade ago, there’s still a lot of confusion surrounding these regulations. Initially introduced in 2004 and subsequently increased to 225% in 2010, R&D tax relief is accessible to anyone investing in innovation.

However, it’s critical to note that the research must be innovative and not “merely duplicate” what’s been done before. So if you’re improving a product currently available in the marketplace, the improvement has to be noticeable. 

As every company is digitally transformed into a technology company, this tax relief is potentially available for organisations across industries. 

To qualify, you have to:

  • Be a UK-based limited company subjected to Corporation Tax
  • Have engaged in R&D projects
  • Have invested in R&D projects
  • Have helped increase the industry’s stock of knowledge

Furthermore, you have to explain how your project helps advance the science and technology field, overcome uncertainty (or tried to overcome uncertainty), and how a current professional in the field couldn’t easily achieve it.

These projects, including software development initiatives, may aim to build new products, processes, or services (or they can focus on improving an existing one).

It’s vital to digital disruption as small businesses are entitled to as much as 225% tax relief on R&D.

R&D tax relief covers the following:

  • Consumables and materials costs (including utilities)
  • (Some) software costs 
  • Staff salaries and contributions (including reimbursed expenses and National Insurance)
  • Sub-contractor and freelancers costs

The US government has a similar programme known as the Research & Experimentation Tax Credit, which helps startups utilise the R&D credit against payroll taxes. Whenever your R&D project is accepted as “qualified research,” you can use it to offset the value of that credit against your total enterprise tax liability. 

How Does R&D Tax Credit Help Startups?

British startups are well-placed to enjoy this tax relief that’s offset against the money spent on in-house software developers, offshore extended teams, and freelance software engineers. 

Those working on disruptive digital products will also receive a tax credit for money spent on some software and related overheads that are directly attributed to R&D. 

However, if your company grows rapidly with over 500 staff and has more than €86 million gross assets, this benefit will no longer apply to your business. 

So how does this work?

For example, let’s say that you’re working on a disruptive digital solution. You can apply and potentially receive tax relief for the money spent on salaries and subcontractor costs directly related to the project.

This also includes work undertaken for clients and your own internal projects. The same is true if you’re working with an extended team in Ukraine (or anywhere else in the world). 

The software used by everyone involved (both on-premise and off-premise), including project management software, can be claimed as an expense through R&D tax credits.

Best of all, the money you get back from the government can be reinvested into the business and drive it forward. 

Such tax relief will ensure that Britain stays on the cutting-edge. No matter what development model you choose to work with (in-house, remote, extended, or freelance), if you’re engaging in innovation, you stand to gain from this tax break.

Are you looking to access R&D tax relief by leveraging a highly-effective Extended R&D Team in Ukraine? Send us your enquiry or request a callback to discuss how Evolve can help!

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