UK Start-up Tax Incentives: R&D Scheme

Posted by Robert Taylor

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Entrepreneurship - Document


To continue in our series discussing tax incentives for UK startups today we will cover the Research & Development (R&D) Tax Relief. Many UK startups have either never heard of this or assume what they would not be eligible for R&D Tax Relief, which as we'll discuss you'll find could be costing them a lot of money.

What is it?
A very attractive tax relief for companies who undertake Research and Development activities introduced by the UK government to encourage scientific and technological development. Profit making SMEs have the potential to claim a 125% Additional Tax Deduction on Qualifying Expenditure. Loss making SMEs have the potential to claim an 14.5% Cash Payment on R&D losses.

Who can claim it?
All companies incurring expenditure on qualifying R&D activities are eligible to claim; irrespective of whether they are making a profit. Importantly, IP does not need to be retained to make an R&D claim. Qualifiying R&D activities are loosely described as using competent professionals to overcome technical knowledge to create technology that does not already exist, could potentially cover all the platform dev costs at least initially, for larger teams one would need to get a specialist in to assess the validity of the claim.

The R&D costs can cover salaries, software, utility bills etc. For contractors this can cover up to 65% of salaries.

A simple example:

Loss making SME with qualifying R&D expenditure of £1,000,000 y/e 31/03/2015
Taxable trading loss (before R&D enhancement): £2,500,000
R&D relief enhancement @ 125% (Based on the £1,000,000 R&D expenditure): £(1,250,000)
Revised taxable trading loss: £(3,750,000)
R&D payable credit ((£1m expenditure plus £1.25m enhancement) x 14.5%): £326,250
Revised trading losses carried forward (total trading loss less amount surrendered): £(1,500,000)

As can be seen from the example above, you can actually receive a cash payment that in effect subsidizes 32.625% of the R&D spend in this given year!