While it may seem logical to involve your accountant in an R&D claim, this approach isn’t always the most effective for your business. R&D tax credits can be highly valuable, but a successful claim lies in getting the detail right. Many businesses naturally turn to their accountant, yet there’s often misunderstanding in how the R&D tax credit scheme works.
Many businesses dismiss R&D tax credits as more trouble than they’re worth, yet they can be a powerful tool for funding your next innovation. There are plenty of reasons innovative businesses should be claiming R&D tax credits, but for the sake of simplicity, we’ve narrowed it down to three of the most compelling. While the claims process can appear complex and require some effort, the reality is that the return far outweighs the input. When approached correctly, R&D tax credits are far from a hassle, providing a significant financial benefit to businesses.
Improving cash flow to accelerate business growth
Innovation can be expensive, putting pressure on a product or service long before it gets to market. Many businesses make the mistake of bringing a product to market more efficiently through claiming back the costs associated with taking it there.
Having this cash injection from HMRC is the most immediate and tangible benefit of claiming R&D tax credits. This extra cash can be reinvested directly into your business to fund your next project, purchase equipment and hire new staff. Under the merged R&D scheme, this equates to a net benefit of around 15%–16.2% of qualifying R&D spend, rising to as much as 27% for R&D-intensive companies under the ERIS scheme. For many companies, this creates a ‘loop’ of sorts, constantly funding their next project with R&D tax credits from their last one. For loss making start-ups, this acts as a physical cash injection from HMRC.
Reducing risk during inception stages
Some of the greatest innovations in history came about from risk taking. Thomas Edison famously tested over 1,000 different materials for the filament before creating a commercially viable light bulb, highlighting that innovation is rarely the result of caution. Each ‘failure’ cost time, money and resources, making R&D Inaccessible for many companies, particularly cash-strapped start-ups. This is where R&D tax credits becomes crucial. Having the R&D tax credit scheme provides a safety net for companies to innovate and adapt, reducing the risk of running out of money before lightbulb filament number 1001. In fact, the UK government encourages companies to take risks to bring about the next major technological advancement. It’s partly the reason for why the UK produces so many unicorns that are tech based. The UK’s economy is built on the notion that leadership in technology is built through big breakthroughs, not incremental changes. For this to be achieved, risks must be taken. A big reason for is when you submit an R&D claim, you can still claim for failed projects as the outcome of your project doesn’t affect the eligibility for R&D tax credits. By it’s nature, R&D operates in unknown territory. In fact, genuine technical uncertainty, where the outcome wasn’t known in advance, is often the clearest indicator that qualifying R&D has taken place.
When businesses invest in development they are committing significant upfront capital with no guaranteed return. R&D tax relief helps offset that cost, improving cash flow and softening the commercial blow if things don’t go to plan.
True innovation will always involve uncertainty and there’s no doubt it can be challenging. So why wouldn’t you want to ease the burden using a government incentive designed just for this purpose?
Competitive advantage
Having a great product or service doesn’t guarantee competitive advantage. You need to be smart with resources and take calculated risks. R&D tax credits do more than just ease financial pressure by creating a competitive advantage as the money claimed back can be reinvested into more R&D. This can drive up a valuation of a company, particularly startups as a proof of innovation or IP acts as a seal of approval of sorts. R&D is an indicator of future earning potential as it shows investors you have a sustainable pipeline for future profit, rather than static products or services which could be made obsolete.
In industries like biotech or software, being first to market can make or break a company. Claiming R&D means you can purchase high end software or laboratory equipment which speeds up the prototyping stage and allows companies to break into the market first.
R&D can also lead to patents and trademarks, creating a legal moat around your business. Moreover, IP generated through R&D activity can also be licensed out creating a passive income from your technology.
Future proof your innovations
If you’re not claiming R&D tax credits for your innovations, you’re putting your business at an immediate disadvantage. By converting the risks of innovation into a sustainable financial loop, R&D tax credits empower businesses to push boundaries without having to compromise.
