As a startup business, it's important to establish best practices and follow them religiously as your company grows. One of these best practices is to understand what R&D (research and development) tax credits you might be able to claim, and how to maximise their benefits. For this, you need to foster the mindset of innovation in your startup, optimise your structure and embed sound record-keeping procedures. You also need to clarify your relationships with self-employed workers and subcontractors, so it's indisputable who is in which category when you make your claim.
1. Fostering the innovation mindset
Successfully claiming R&D tax credits has a very positive impact and creates a mindset geared towards future innovation – and yet more R&D benefits. Once you've received your first credit, you get a financial bonus and a boost to productivity and valuation. This is an incentive to more R&D innovation and consequently more R&D tax credits in the future. Understanding this mindset and fostering it will help to increase R&D tax credit claims. You'll learn to recognise the potential for innovation and become more familiar with the process, reducing the stress and uncertainty that can arise from the inevitable risks involved. You can bolster this mindset and reduce some of the stress by adding in the opportunities offered by grant funding. Government grants can be an excellent source of additional R&D funding, but you need to be careful about what you can claim, and in what ways getting a grant will affect your available R&D tax credits.
2. Optimising administrative structure
If you haven't yet formalised your company structure, there are some things that will help you maximise your claims for R&D tax credits. Firstly, to be eligible for the credit you need to be structured as a limited company, paying corporation tax. Longer term strategies for optimising claims include determining how to pay company directors involved in R&D projects. If possible, pay them a salary rather than a dividend, because salaries can be claimed as an R&D credit and dividends can't. This depends, naturally, on what other financial considerations influence your decision, but don't forget to factor it in. If, for example, directors are conducting R&D activities, but are salaried by an entity other than that filing the R&D claim (such as a parent company), you may be obliged to exclude these costs, even if they are later recharged. Similarly, if you are part of a multinational, only R&D projects conducted in the UK are eligible.
3. Pre-trading expenses for the first R&D tax credit claim
It's quite likely that you'll already have undertaken some extensive R&D before you began trading, as this is normally required in order to develop whatever goods or services you'll be delivering. It is important, when preparing an R&D tax credit claim, for startups or newly formed companies to take account of any such pre-trading R&D expenditure, as these costs are considered an enhanced trading loss when you file your first claim. Converted into cash credit, they will give your cash flow a much-needed boost. As soon as you begin work on any R&D projects, therefore, you should keep an easily accessible record of any advances you sought and received, together with the risks and uncertainties involved in R&D.
4. Embedding sound record-keeping procedures
It is important for the first and any future claims to keep such records. The costs of any consumable materials you use for your R&D projects should be carefully recorded on your books, especially if you are building prototypes or running trials. If your accounting system allows for it, one method for doing this is to issue an in-house purchase order. You should also keep track of material wastage and the value of any goods that you sell on. Keep an up-to-date list of all the R&D projects that you are working on for each year, to make sure no project is overlooked, even if it turns out to be ineligible.
One of the key features of a claim for R&D tax credits is the cost of personnel. HMRC expects a claim to demonstrate good record-keeping, which includes the time spent by every employee on every individual R&D task. Your staff therefore need to be clearly separated into two categories – those who are involved in R&D projects and those who aren't. Incorporating a precise, real-time system of record-keeping will aid immensely in your preparation of R&D tax credit claims. Keep a detailed log as you go of all staff time which has been devoted to R&D, and you'll have a store of direct evidence on which to base a more robust and potentially larger claim.
5. Clarifying roles: EPWs and subcontractors
Another key feature required by HMRC is a clear distinction between the type of staff you are employing for R&D projects; in particular, whether any of the work is outsourced or subcontracted. For the purpose of claiming the tax credits there is a crucial difference, in that EPWs are people provided from an external source to complete the work, while subcontractors are people with their own business who provide you with a service. This is particularly significant if you are also claiming the RDEC government grant, as only EPW costs are admissible.
Your R&D tax credit claims can also be improved by deciding and documenting which party in a subcontracting relationship can claim ownership of the R&D. Both parties can potentially file the claim for a project, but only one or the other will be eligible for the tax credits – you can't claim twice for the same project. To make sure this relationship is fully understood, both parties should draw up a clear contract which stipulates who has the entitlement to claim.
To understand all these considerations fully and help you to optimise your claims, we strongly recommend the services of an experienced R&D tax credits advisor such as The Accountancy Cloud. We can offer you continuous consultation to steer you through the maze of available finance, ensuring that your R&D tax credit claim is correctly calculated. If you would like a callback please do contact us and one of our experts can help.