Dialling it up to 11: maximising your research and development tax relief claims
Once you’ve established that your innovative technology business might be eligible for research and development (R&D) tax relief, how can you get the very most out of your claim?
As is often the case in accounting, it’s about taking a little extra care and giving your decisions a bit more thought, especially in the preparation stage.
Though there’s no magic trick, the steps you need to take are relatively straightforward, and will generate concrete results that could make the difference between failure and long-term success.
Take pre-trading expenses into account
We work with a lot of technology start ups and it’s these businesses that will benefit most from a focus on pre-trading expenditure.
Normally, pre-trading expenses don’t qualify for relief but it’s different for R&D. This reflects the fact that the path towards the founding of a new business in the innovation sector isn’t always straightforward.
If the idea isn’t sound, what’s the point in forming a company? And how do you know the idea is sound if you don’t undertake R&D?
Here’s how it works: if a small or medium-sized company incurs qualifying R&D expenditure in the pre-trading accounting period then it can elect to treat 230% as a trading loss for that accounting period.
That means, in practice, you can often claim a cash credit before you technically start trading – which can be massively helpful in getting things off the ground.
Keep comprehensive records
This is one thing we don’t usually have trouble persuading innovative businesses to do. After all, if you’ve been trained in the scientific method, or are used to writing code, you already know the value of documenting your work.
To support you in making the most of your R&D tax relief claims, we like to see, for starters:
- Financial records – detailed so we can identify allowable expenses you might have missed.
- Records of staff time – timesheets, project documentation, demonstrating the percentage of an individual’s time spent on R&D work.
- Project records– so we can refer to experience and precedent and potentially find additional opportunities to claim relief on projects you might have assumed weren’t eligible.
Ideally, record-keeping will be baked into your systems and processes, using integrated cloud accounting and team management software.
Actively manage tax losses
As we mentioned last month in our piece on R&D tax relief myths, you don’t have to be profitable to make a claim.
In fact, the scheme is arguably even more useful for loss-making companies, allowing you to claim a credit of up to 33% rather than the standard 25% relief.
It goes without saying that nobody wants to make a loss. When it becomes apparent that’s the way things are heading, though, you should pause, talk to a tax expert, and make a plan to get the best out of the situation.
It’s all about giving your business the best possible chance to thrive, survive and see its innovative projects through in the long-term.
Pay directors salaries, not dividends
In standard businesses, there’s often a tax advantage for directors in extracting profits from the company through a combination of salary, dividends and pension contributions.
When it comes to R&D claims, however, the opposite applies. Your tax credit claim can include salaries for staff engaged in R&D, but not dividends.
Which approach works best for you will depend on the extent to which R&D is at the core of what your business does, or just one part of a more complex operation.
To find out how to give your business a boost through R&D tax relief, get in touch.