Boosting Innovation - How R&D Tax Relief Can Empower Tech Startups

When it comes to the fast-paced world of “Tech,” new product development and innovation tend to go hand in hand.

By their very nature, tech start-ups are continually investing in research and development to stay ahead of the curve, develop groundbreaking products, and improve their position in the market. These investments drive technological advancements, helping UK start-ups bring new products and services to market and maintain a competitive edge against the global tech landscape.

In 2023, despite the precarious economic situation, UK tech start-ups collectively raised £10.2billion, highlighting their commitment to innovation and the key role of R&D in their growth strategies[1]. However, when we compare this with the amount raised in 2022 - £24billion, it raises questions about whether funding speeds are slowing.

Investing in R&D during a Challenging Economic Climate

The current state of the economy is impacting businesses across numerous industries. This is having a knock-on effect for those tech start-ups looking to invest in R&D projects. As a result, investors are becoming increasingly reluctant to fund R&D projects with unpredictable outcomes or a clear return on their investment.

The availability of funding through venture capital has been inconsistent in recent years due to the economic uncertainties caused by Brexit and the COVID-19 pandemic.

In 2022, venture capital investment in the UK experienced a decline, with tech startups particularly affected as the growth rate of new tech unicorns dropped significantly compared to the previous year[2]. As a result of these challenges, tech startups often operate on tight budgets to fuel their innovation efforts[3]. The excessive costs associated with R&D activities, combined with limited financial resources, can interfere with the ability of tech startups to pursue innovative projects and scale their operations.

Unlock R&D Tax Relief to Boost Innovation

R&D tax relief opens opportunities to unlock significant savings on your corporation tax bill or to provide a cash injection for your business. For this reason, companies that focus heavily on innovation consider R&D tax relief a key factor in their financial plans. The government scheme helps businesses claim back a portion of their R&D costs, providing tech start-ups with a clearer picture of how much their R&D projects will truly cost. This can also help when budgeting for future projects, as it helps with forecasting cash flow to better guide future investments. By planning your R&D claim, you stand a better chance of maximising your benefits.

Tips to Maximise your R&D Claim

R&D tax relief can be a minefield without adequate preparation and knowledge of the relevant legislation. To optimise and increase the accuracy of your R&D claim you should make sure to:

Keep records of project timelines to increase the accuracy of your application.
Track your R&D expenditure to ensure no costs are missing when it comes to submitting your claim. Excel templates are a simple but effective way to track your costs.
Keep up to date with the latest legislation or seek advice from a reputable specialist. Being aware of the regular changes to the scheme will enable you to recover everything you’re entitled to and minimise the likelihood of a compliance check being opened by HMRC.

Common R&D Tax Relief Misconceptions

Only successful projects are eligible for R&D tax relief

Research and development is used to enhance your products and/or services by overcoming scientific or technological challenges that experienced professionals have difficulties rectifying. The outcome of the project, however, does not influence its eligibility. Additionally, a project and claim can simultaneously be ongoing, meaning that alternative approaches to development are still being trialled.

Only new products and services qualify for R&D tax relief

HMRC’s guidance clearly states, “An advance in science or technology may have tangible consequences (such as a new or more efficient cleaning product, or a process which generates less waste) or more intangible outcomes (e.g. new knowledge or cost improvements)”[4]. Therefore, projects aimed at improving specific characteristics of a product, service, or process could also be eligible for R&D tax relief.

Companies that receive grant funding cannot receive R&D Tax relief

Receiving a grant to support R&D projects does not mean R&D tax relief cannot be accessed. Under the old guidelines (which still apply to many applications), grant funding did impact how a business could go about receiving tax relief on the relevant projects, though it is still possible to do so. With the new legislation, which will affect accounting periods beginning on or after 1st April 2024, grant funding will not impact R&D applications.

A competitor beat me to it or has done something similar, so I can’t claim

HMRC has specific guidance that covers this scenario: “If a particular advance in science or technology has already been made or attempted but details are not readily available (e.g. if it is a trade secret), work to achieve such an advance can still be an advance in science or technology”[5]. Put simply, it does not matter if your competitors have already achieved the same or a similar advance that you're seeking to achieve, so long as the details relating to the advance are not available in the public domain and you have had to go through your own R&D process, you will be eligible to recover your costs.

Powering Future Innovation

R&D tax relief is more than just a financial incentive; it is a catalyst for future innovation. By alleviating some of the financial pressures, tax relief empowers tech startups to dream bigger and innovate more confidently. For tech startups looking to leverage R&D relief, it is crucial to understand the eligibility criteria, keep records, and seek professional advice to maximise the benefits. With the right approach, R&D tax relief can be a powerful tool for tech startups to drive innovation and secure a competitive edge.

To read more of our Entrepreneurship Hub knowledge articles, visit: https://www.beta-den.com/news/category/entrepreneurship-hub/

Written by Jack Morgan, Director of Apogee Associates