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Building your business with R&D tax credits

The early days of building a business can be stressful, busy and, most of all, expensive. Turning an innovative idea into reality costs money. But what if someone told you that you could get money back for building your business?

Free start-up funding sounds like a scam with a catch. However, the R&D Tax Credit scheme is both government-funded and used by thousands of UK entrepreneurs for business growth and innovation.

Yet, only 17% of R&D tax credit claims are made by companies up to five-years-old – meaning that a significant lack of start-ups aren’t taking advantage.

But how does tax relief translate into business growth?

What are R&D tax credits?

Research and Development (R&D) tax credits allow businesses to claim back a proportion of their research and development spend as tax credits – reducing their tax bill or increasing their taxable losses. And, these tax credits are available to more businesses than you might think.

As long as you’re a limited company in the UK, subject to Corporation Tax, and have spent money on research and development, then you pass the initial test. This can lead to start-up funding for innovations, including:

  • Product development
  • Service enhancement
  • System improvements
  • Bespoke solutions

Basically, any activities that advance science and technology – activities common in a start-up.

How R&D tax credits can help you build your business

With the average SME R&D claim being £54,000, research and development tax credits certainly help cover costs lost during the innovation phase. However, the more savvy companies are using research and development tax credits to grow their business and develop a competitive edge.

This is done by following the innovate > funding > innovate > funding cycle.

  • Innovate – you spend your start-up investment funds on an R&D-eligible innovation
  • Funding – you apply and receive R&D funding for the completed innovation project
  • Innovate – you re-invest your R&D tax relief into a bigger innovation project, involving more staff, subcontractors and materials (growing your business)
  • Funding – you apply and receive a larger R&D credit

This cycle repeats itself – giving you more start-up funding and cash flow to invest in bigger innovations that push your business to the next stage.

The best way to demonstrate this business growth cycle is by looking at some real-life examples.

Examples of R&D tax credit business growth

By using research and development tax relief to invest in new skills, process, products and talent, the following companies have scaled their business while gaining a competitive advantage in their market

Haberdashery

An award-winning design studio focused on the perpetual appeal of light. They’d been working on a cordless “Dawn to Dusk” colour-changing floor lamp that supports the human circadian rhythm.

Central to the innovation of this lamp was the development of a custom LED array, that couldn’t be achieved with existing technology. This was the innovation that secured Haberdashery research and development tax credits.

The funding not only contributed to the design of new technology that no one else in the market had access to, but they also used these funds to attend a European trade show and launch five new products. As a result, they increased their product range, expanded brand awareness and grew their business.

Lupe Technology

A start-up that is changing the substandard cleaning reputation of cordless vacuums. They’ve been working on the world’s best performing cordless vacuum, that matches its corded rivals by delivering powerful suction for a sustained period.

As part of early-stage pre-production, Lupe Technology designed patent technology and a product platform from scratch – qualifying them for Research and Development tax funding in addition to their Innovate UK grant.

This funding has enabled them to take their business to the next stage by carrying out advanced-stage developments for product production and delivery; also qualifying for R&D funding.

By paying the funding forward, Lupe Technology can invest in the next stage of development and advance towards delivering a product that cleans better and lasts longer than its competitors.

5th Dimension Tooling Ltd

A specialist engineering company that designs and develops bespoke tools for its customers, using CAD/CAM and CNC machining.

Committed to continued growth and business development, 5th Dimension Tooling Ltd commits itself to approximately 20 R&D projects each year. The funding from each project has been integral to the expansion of the company.

5th Dimension has used the funds to offset costs of additional equipment and for centralising its operations, which has enabled them to offer two new services to clients.

Other ways that businesses use R&D claims for business growth and competitive advantage include:

  • Investing in world-class talent – Many businesses use funds to grow their teams, attract sought-after candidates and build internal knowledge that outperforms competitors.
  • Funding subcontractors – Businesses that aren’t ready to increase headcount instead invest the funds in the specific skills and expertise required, by paying for expert contractors.
  • Purchasing new equipment – Start-ups at or beyond the production stage use funds to purchase the equipment necessary to speed up production or increase service offerings.
  • Developing new processes – Other businesses gain productivity advantages by developing new systems and processes that increase efficiency and profitability.

How to claim R&D tax credits

So, how do you get started with claiming research and development credits for your start-up? Our top tips for getting started include:

1. Establish eligibility

Find out if your business and projects meet HMRC’s criteria for SME R&D or RDEC (Research and Development Expenditure Credit) by using our R&D eligibility tool.

2. Calculate your qualifying expenditure

Incorrect claims can delay funding and trigger an HMRC enquiry. Therefore, it’s crucial that you understand what constitutes qualifying expenditure and that your R&D tax credit calculation adds up.

3. Maximise your claim

Grant funding could affect your tax credit claim but, as with Lupe Technology, it’s not fatal to a claim. Similarly, depending on your situation, it may be more beneficial to surrender your losses or carry them forward. If you’re unsure about the best calculations for your claim, involve a specialist – it may save you money.

4. Complete your application

Finally, you’ll need to complete your R&D tax credit application with a technical narrative and financial evidence. This requires industry knowledge – obtained either by completing the application yourself, or working with an expert who knows your industry.

If you’d like to unlock growth in your business that start-up funding has so far prevented, speak to an advisor for a free consultation to see if you’re eligible.

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