In the Dragons' Den, analysis of the businesses finance is often where most entrepreneurs fail not least because of the numbers that they must remember and of course future projections. But what if they came to the den not only having in depth understanding of the business financials but also of what tax incentives are available to the business. This would not only show that you have an understanding of the current financial position of the business but also what incentives are available to facilitate the future growth of the business, making you and your business equally investable.
R&D Tax Incentives
The R&D Tax Incentive is one of those few and precious allowances that can actually relieve cash flow woes. Better still, it provides businesses with an incentive to actually create new products by testing ideas they may otherwise feel are too risky.
R&D tax credits are a tax relief scheme that help companies claw-back some of the cost that goes into developing new products, processes or services. This enables qualifying companies to potentially receive a cash payment or tax deduction. R&D tax credits were first introduced back in 2000 initially to SMEs only, and then in 2002 the tax credit scheme was rolled out for larger organisations too.
6 Things you need to know about R&D Tax Credit:
1. You don’t have to be in tech
Some start-ups might think they have to be working in hardware/software to make a claim. Not so, you could be in software engineering, agriculture, in the energy sector…whilst there are many examples of innovation in the food and beverage industry too.
R&D in this context is really about solving problems and encouraging new solutions, as long as you’re going through a process of testing and you didn’t know how to solve the problem at the outset, you should be looking into making an R&D claim.
2. What classifies as research for R&D tax credits?
There’s often a perception that research and development is limited to something scientific or something related to new product development. For example, a group of people in a room or a lab, putting their minds together to research something new. This couldn’t be further from the truth. Most businesses are doing research and development every day, most unaware of this fact! If your organisation is coming up with ways to be more productive, effective, efficient and innovative, then you are likely carrying out R&D tasks on a regular basis and may be eligible for R&D tax credits.
3. What can impact my R&D tax credits claim?
There are a number of things that can impact the R&D tax claim of an SME. These include any existing grants or subsidies you may already have received to help you on an R&D project and any work that has been subcontracted out. You cannot claim on the SME scheme as a subcontractor but you may be able to claim as a subcontractor under the large company scheme. You can find out more about that here.
4. What is the rate of tax relief with R&D tax credits?
As of April 2015, the R&D tax relief for companies is 230% for SMEs and 130% for large companies. This might not mean much to you at the minute, but this 230% relief means that for every £100 of qualifying spend, your taxable profit could be reduced by an additional £130 over and above the original £100 on R&D. For a large company, this will be £30 for every £100 spend.
5. How far can I claim back R&D tax relief?
You can go back two full financial years (that’s your company’s financial year, not ‘tax’ years).
6. What is eligible expenditure?
For eligible projects, it is the money spent on salaries, externally provided workers, subcontractors, software, utilities and materials ‘consumed or transformed’, such as chemicals, materials, batteries and certain forms of tooling.
It’s clear that examining your eligibility for the government’s R & D Tax Incentive scheme should be a priority for all start-ups. It’s more than just a grant for many businesses it can mean the difference between investment or none at all.