The UK Research and Development (R&D) Tax Credit scheme is the most generous and most widely adopted means of supporting R&D in early-stage companies. Loss making start-ups can recover up to 1/3 of the cost of qualifying R&D as a cash rebate. May Figures, specialist tech tax advisers, give their tips on how to optimise your R&D claims.
To qualify, R&D must:
- advance a field of science or technology,
- seek the resolution of a scientific or technological uncertainty, and
- not be obvious to a competent professional working in the field.
Tech start-ups usually carry out at least some activities that meet these requirements.
However, once the business has progressed beyond early Proof of Concept (PoC) or Minimal Viable Product (MVP) and enters the scale-up stage the nuances of the scheme can catch out unsuspecting companies and inexperienced accountants and advisors.
A reduced rebate can seriously damage cashflow and/or investor relations.
HMRC often investigate scale-ups as claim values increase because the costs associated with commercialisation of (known) technology can’t be claimed for. So, to ensure claims are robust and defensible they require a detailed understanding of the work. And each technical advance and/or uncertainty needs to be identified and supported by a technical report.
Contracts (with partners, suppliers/sub-contractors, investors, etc):
The nature and wording of your contracts can also have a significant impact on R&D claims. Be aware of the need to check common contracts, for example, where:
- you are providing R&D related services;
- a supplier/ sub-contractor provides technical services for an R&D project you undertake;
- you use licensed software for an R&D project;
- you sell software via a license (SaaS etc) that is used for an R&D project.
If poorly worded, these contracts can result in a claim moving from the SME scheme (highest tax relief) to the RDEC scheme, with an approximate 2/3 reduction in claim value (despite the company remaining an SME).
And where sub-contractors carry out development work, up to 100% of those costs may be unclaimable.
Unfortunately, the lack of clarity in the legislation means there is some ambiguity around the tax treatment, in even the most basic commercial relationships.
So, when entering into contracts like this, it’s important to get good legal and R&D advice up front. Sometimes, the best structure for preserving R&D tax relief will be less favourable from a commercial perspective.
May Figures recently advised a University spin-out SME developing advanced materials. The company entered into an interesting relationship with a large American company whereby it will receive monies to undertake R&D (adapting materials for testing), alongside a future supply agreement (if the materials are suitable) and an equity investment. By working closely with the SME and their lawyers the initial draft contract was recrafted to meet the commercial needs of both parties, whilst ensuring the resulting R&D projects could be claimed as efficiently as possible under the SME R&D Tax Credit scheme.
May Figures have extensive experience handling HMRC enquiries into R&D Tax Claims, successfully defending and in some cases, even increasing the value of client claims. If you want to discuss your R&D Claim with them, you can contact them on firstname.lastname@example.org