Research and development (R&D) tax for startup businesses
Start-up businesses in the sciences and technology niches often come up with brilliant business ideas. However, many do not have the financial support they need. Luckily, there are a myriad of ways to get financing for a start-up business. One of the best and proven ways is by claiming a research and development tax credit.
A few years ago it was only the well-established and large companies with significant contributions to industry knowledge that could have access to the research and development tax credit. Not anymore, as medium and even small companies are now eligible for this form of tax credit.
Any company that improves or develops software, products or/and processes in a given group of industries is now eligible. The industries supported by the government include those in engineering, computer science, biology, chemistry, and physics. The government provides the incentive as a means to reduce the costs of research and development borne by a company.
How R&D Works
If your company gets access to the tax credit, you can recoup up to 130% of your research and development costs as cash. Alternatively, you could opt not to receive it in cash and use it to reduce the amount of tax you are expected to pay.
While the tax credit has been around since the year 2000, many start-up companies in the preferred niches do not know how to take advantage of it. The tax credit can be used to complement your grant if you already got it, or as a substitute for innovation grants.
In most instances, the credit you get for R&D is about a third of your total costs on qualified projects. To determine how much you are eligible for, you need to calculate your total R&D expenditure. You will get 133 pence for every pound you spent. It is up to the authorities to classify your financial position and determine if you qualify for the tax credit on your R&D projects.
How to Qualify for the Tax Credit
The tax credit advantage could be the lifeline that your business needs to grow. To qualify for this tax credit, you will be required to explain to the authorities how your business through its research and development can:
1) Come up with or discover important technological or scientific advances
2) Overcome uncertainties and issues effectively
3) Stand out from many other inventions and discoveries made by other similar companies in the industry
The R&D project needs to be in the technology, computers maths and sciences field to qualify. You might not be eligible for the R&D tax credit if your company’s niche is in the theoretical, economic, and social sciences.
The advancement that your company comes up with needs to be relevant to the entire industry and not be valuable only for your business. The invention or discovery needs to be the first of its kind and not an existing technology that your company wishes to try out.
Once you present your idea to the officials, you will need to show that your company has the capacity to overcome any uncertainty in the project. Among the things you need to show are the results of analysis and results. You also need to show that your results cannot be replicated by other experts, by presenting your trial tests.
Once you get the approval, you can use the money to offset a small fraction of your subcontractor expenses, staff costs, and expenses for consumables such as utilities and raw materials. You need to note that the tax credit cannot be used to claim relief for costs made in rental fees, patent processing, distribution and production of products.
If you are a small or medium-size business needing help with the R&D tax credit, you can use an online portal to help you understand the process. They will help you in the filing of the claim for R&D tax relief and help you understand how the process works.