R&D Tax Credits and Advice to Help Tech Startups

The research and development of new technologies has long been essential to the growth of UK-based tech startups, as when dealing with cutting-edge and emerging industries, teams must be able to facilitate organic demand in competitive markets by continually improving upon available products. 

How are R and D tax credits changing? 

What are R and D tax credits? (pre April-2023) 

Looking into the previous R&D tax credits scheme in a little more detail reveals that the available tax relief offered to UK companies could be divided into two packages. For SMEs with less than 500 staff, turnover below €100 million and gross assets under €86 million, an extra 130% deduction rate was applied on top of the standard 100% to create a 230% total tax deduction applied to qualifying costs from yearly profits. 

Additionally, startups meeting these criteria who record losses at the end of the tax year would be eligible to claim R and D tax credits worth up to 14.5% of their total reported losses for the year. 

The second package was aimed towards larger entities, though as qualifying companies must only report turnover and gross assets above the previous threshold, smaller companies could still become eligible. Under this relief program, companies could claim tax credits equalling 13% of all R&D-related costs. 

How do changes to R&D tax credits affect startups? 

The changes due to be enacted in April 2023 are set to drastically lower the available SME R&D tax credits deduction rate from an additional 130% to only 86% of qualifying costs, equalling a total deduction rate of just 186% compared to the previous 230%. In practice, this means tech startups currently engaged in long-term R&D projects are set to see their costs increase by as much as 44%. 

In addition, SMEs and startups reporting financial losses will see their claimable R&D tax credits drop significantly from 14.5% of total surrendered losses to 10%, again hindering long-term R&D projects. 

Comparatively, larger companies who previously qualified for the 13% fixed R&D tax credits rate will see their claimable rate increase to 20%. These changes have been met with considerable criticism from across business sectors, with some studies suggesting that the average UK startup could lose between 30%-40% in relief that they previously received, equalling an estimated £100,000 per year. 

The UK government has recognised some of this criticism, and in response have announced a new higher R&D payable credit rate for research and development intensive businesses. Loss-making SMEs with an R&D intensity of at least 40% will be eligible for a higher rate of SME payable credit taking effect for expenditure incurred on or after 1 April 2023, in continuity with the current payable credit rate, claimed as they currently do in their Corporation Tax return.

The government does remind SMEs that due to this change being legislated in a future Finance Bill, companies will only be permitted to claim such relief at a later date, after the legislation is in place. Companies making a claim for relief before this will receive the new 10% rate from 1 April 2023, though R&D intensive SMEs wishing to claim additional support are advised to delay their submissions or amend their claims once the legislation is in place, more info can be found here. 

R&D tax credits: what can be claimed? 

Though at present it appears unlikely that the government will reassess these changes, UK-based crypto startups can insulate themselves to some extent by ensuring that all ongoing research and development projects are appropriately labelled within the confines of HMRC’s official guidelines. 

To do this, it’s vital that a small business understands which costs HMRC currently views as eligible for R&D tax credits and can answer the question: why is research development important to your operations? 

The costs covered by R&D credits currently include: 

• Material costs – Any costs incurred for materials used specifically for R&D projects may be included in an R&D tax credits claim, this could be materials used to create prototypes, to perform trials or to manufacture a final product, though not if the product was later sold 
• Staff costs – Employee wages, national insurance/pension contributions and expenses directly related to R&D projects can form part of a claim, though these figures must be accurately apportioned, that is if a person spends 50% of their time working on an R&D project only 50% of their combined costs will become eligible for R&D tax credit relief 
• Utility costs – Any consumable utility used up during R&D, including water, electricity, fuel and gas, though only the amounts directly used during active R&D projects/processes/trials 
• Software costs – If a tech startup is required to buy a design or control program to perform an R&D project, purchasing and licensing costs may be included in their claim, though if the software is also used for non-R&D-related work these costs must be accurately apportioned 

How to make a research and development tax credit claim

It is possible for startups to compile and submit a successful R&D tax claim themselves, though it’s advised that businesses hire a tax professional to ensure that all possible expenses are correctly and appropriately labelled to maximise the relief awarded, especially with the new regulations in effect. 

When considering which expenses will qualify for R&D tax credits, startups must ensure that the work they’re performing is unequivocally centred around the advancement of science and/or technology. For startups in the crypto space, some blockchain research activities can qualify for tax relief, including: 

• Developing new blockchains 
• Developing new hardware/software wallets 
• Developing new nodes 
• Developing blockchain security solutions 
• Developing smart contract infrastructure 
• Developing new APIs 

Research and development grants 

In addition to R&D tax credits, the government does typically offer a range of grants to help fund certain R&D projects. Though there are no dedicated crypto-related research grants available at the time of writing, the government has announced plans to make the UK a global crypto asset technology hub in the coming years, so it’s worth checking the UKRI website for updates on crypto grant funding. 

Summary

Despite the incoming changes to the R&D tax credits scheme having the potential to negatively affect UK-based tech startups, understanding how to appropriately classify research and development projects in line with HMRC guidance can help to ensure that companies don’t lose vital tax relief. 

For startups requiring some assistance in learning how to account for R&D tax credits, or those who seek support in navigating the newly imposed rules, please contact our team of highly skilled crypto accountants to help guide your business in the right direction. Click here to book a free consultation.