The UK Government’s research and development scheme provides lucrative opportunities for businesses big and small to increase their cash flow through an investment in innovation.

But, with each passing year, thousands of pounds’ worth of eligible R&D funding goes unclaimed.

Of these eligible businesses, many are start-ups who simply lack the knowledge and understanding of the system to claim what’s rightly theirs.

So, we’re doing something about it.

In today’s post, we’re exploring some of the most common reasons start-ups are missing out on R&D tax relief, providing actionable advice and busting myths and misconceptions along the way.

“We don't know what it is”

It’s important not to overlook the fact that some start-ups simply won’t have all the information they need available to them - meaning many aren’t aware that the R&D tax credits scheme even exists.

It’s key for new start-ups to familiarise themselves with the R&D tax credit scheme, as these government-funded tax incentives provide many with a welcome increase in cash flow.

The idea behind the scheme is simple: by providing a financial incentive for businesses to innovate, British businesses will remain at the forefront of industry growth and evolution.

It’s accessible to any company in any sector, too. This is a common misconception for new start-ups, who often presume innovation funding is only available to rapidly changing environments such as tech or pharmaceuticals.

But this isn’t the case. Providing your activity meets a range of eligibility criteria, you’re likely entitled to R&D tax credits.

Paid in cash instalments to loss-making companies or as a Corporation Tax rebate to profit-making businesses, the amount paid can often be generous, too - with as much as 33p able to be claimed back on every £1 of qualifying spend.

To any start-up learning about research and development opportunities for the first time, it will quickly become clear that it pays to know how R&D pertains to your business.

Be sure to check out our dedicated page explaining the fundamentals of R&D tax credits - you can find it right here.

“That sounds too good to be true”

The lucrative potential of the UK research and development scheme can cause some initial apprehension.

Yet the truth is that it’s a legitimate, government-funded incentive that provides benefits for all involved. Businesses can counteract the financial risks of pursuing innovation, while the UK economy benefits from British businesses remaining at the forefront of global industry. A real win-win.

Despite this, a mammoth 90% of eligible businesses don’t claim. And with the average claim value currently sitting at £54,196, it doesn’t take a master mathematician to work out that there’s ample opportunity being missed.

On average, successful applicants receive between 26% and 33% of their research and development expenditure back through R&D tax relief. And remember: this relief isn't it all going to major brands and corporations. On the contrary, to be eligible for the SME scheme, you must simply:

• Have fewer than 500 staff
• Either no more than €100 million turnover or €86 million gross assets

This means most small companies, including start-ups, are likely to qualify from the off.

“We don’t conduct research and development”

Many of the everyday activities you consider ‘run of the mill’ for your industry may actually qualify as eligible R&D activity.

All too often, start-ups assume they’re not entitled to R&D tax relief because they’re not embarking on large-scale, purposeful R&D projects.

However, the official criteria for what activity constitutes research and development is broad. Primarily, it places the focus on whether you attempted to overcome ‘scientific or technological uncertainties’.

It’s important to note that this includes internal projects, too, and isn’t concerned with the commercial success of your project. This means that you may qualify for funding if you’ve conducted any internal or external activities that: 

• Aim to innovate a new product, operation or service
• Aim to innovate a modification to an existing product, operation or service

Some examples of how this translates into an everyday work environment include:

• Developing a new internal process
• Innovating a new product design
• Researching a new material
• Exploring new methodology
• Improving the performance of a system
• Developing a prototype

Once again, it’s key to emphasise that your activity doesn’t have to be a success in order to obtain funding. Even if you didn’t see the project through to completion, providing you meet the eligibility criteria, you could still claim back the costs of:

• Staff salaries (including NIC, pension contributions and any expenses)
• Materials and consumables used throughout the project
• Software
• Clinical trials
• Freelancers and subcontractors

For a more detailed breakdown of eligibility criteria and what opportunities are available for your business, check out this handy blog post. Elsewhere, for an estimate of how much your claim could be worth, why not utilise our tax credit calculator?

“We’re not entitled as we have no employees”

Sure, staff salaries can often be one of the main ingredients in an R&D tax credit claim, but this doesn’t mean that new start-ups with no employees aren’t eligible.

Regardless of the size of your team, providing you’re a UK-based limited company, you’re entitled to apply.

While, previously, you weren’t able to claim cash credit without paying PAYE and NIC, this stipulation was abandoned back in 2012. Now, one-man teams are able to claim qualifying expenditure through the SME scheme in the same way they would if they did make PAYE and national insurance contributions.

Things get a little more complex when claiming under the RDEC scheme with no PAYE or NIC contributions, but this shouldn’t be a concern for any start-up.

“We’re not entitled as we didn’t turn a profit”

Profit can be wishful thinking for newly launched start-ups. But this doesn’t mean you won’t be entitled to R&D tax credits.

On the contrary, the scheme is specifically designed in recognition of the fact that many start-ups take time to begin turning a profit. Successful R&D claims are paid out as lump sum payments to loss-making companies, as opposed to being offset against your Corporation Tax.

Remember: a project doesn’t have to be commercially viable for you to secure tax relief, providing it met other eligibility criteria.

“We don’t know how to apply”

We understand that filing an R&D tax relief claim can seem like a daunting task if you’ve never done one before - this is the case for many new start-ups.

Successful claims have the following in common:

• A convincing technical narrative
• A clear table of financial calculations and proven record keeping
• An accurate amendment of CT600 successfully filed with HMRC

The trick is proving to HMRC that you fully understand their definition of R&D and have diligently applied it to your own costs and activity. Do so successfully, and your claim should be paid out within 2-8 weeks (subject to workload).

More than anything, this emphasises the importance of getting your claim right the first time around. Knowing what HMRC is looking for and delivering on that is a sure-fire way to maximise your likelihood of success and ensure you receive all the funding you deserve.

With so much to consider as part of your claim, it's worth recruiting a helping hand - especially if you’re a fresh-faced start-up new to the world of R&D. Why not get in touch with Lumo to get started?