R&D tax relief should be a no-brainer for tech start-ups – they’re usually doing loads of innovative R&D, have eligibility up to the eyeballs and, by definition, are always on the look-out for funding! So why is the up-take of R&D tax relief so low amongst these companies?
During our time in the R&D tax relief world we’ve observed that there are three very common reasons for start-ups not to claim, and none of them are that they are unaware of the scheme!
They’re too busy
Now, we know that busyness is probably the most common reason given by any company to avoid working on their R&D tax claim, but this is especially true for start-ups. Most founders are busy trying to find funding, develop their product, sell the product and grow their team, all whilst being unsure whether the business will even exist in three months – it’s exhausting!
For a founder to take time out of their schedule to work on an R&D tax claim they have to be completely convinced that it’ll be worth their time, which leads on to our next two points.
They’ve had grants and other funding
Even now, a lot of companies (and even R&D tax providers!) think that you can’t claim R&D tax relief if you’ve received grants and other funding. This belief is especially widespread amongst start-up founders, which is unfortunate given that they are also more likely to have received grant funding!
Of course, while having received funding doesn’t prevent a company claiming R&D tax relief, it does affect the tax benefit that they can expect to receive. If a start-up founder only has one project with low costs that has been grant funded, only getting RDEC relief might not be worth their time and effort.
They don’t have enough eligible costs
This can be the killer reason for start-ups not claiming R&D tax relief. In the early days, founder/directors are often completely unpaid or on very low salaries. In the absence of other staff salaries or significant raw materials or subcontractor costs, this can be a complete blocker to making a claim. Furthermore, as start-ups begin to become profitable, founders often decide to pay themselves through dividends, which can keep the eligible expenditure below a feasible level for making a claim.
What can I do for my start-up clients?
Helping your start-up clients understand the best ways to fund their business and the implications of funding decisions, can be invaluable to their success. For example, being able to advise on the tipping point where taking a grant can actually cost a company money in the long term could help prevent your client taking on the burden of an inadvisable grant. In the same vein, looking at the tax affairs of a start-up holistically could highlight whether taking a salary or dividends is better in the long run.
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