R&D Tax Credit

The R&D Tax Credit is a UK government tax incentive designed to encourage innovation by allowing businesses to claim tax relief on qualifying research and development expenditures. The scheme operates through two programs: the SME R&D Tax Credit for companies with under 500 employees and £100M revenue, and the RDEC scheme for larger enterprises. Credits can be received as cash payments or applied to reduce future tax bills.

The R&D tax credit scheme is a government tax incentive to promote UK businesses investing in innovation. R&D tax credits can either be paid back as cash, or reduce companies’ next tax bill.

In reality there are 2 separate tax credit schemes:

SME R&D Tax Credit scheme for small and medium-sized businesses (SMEs). Companies must have less than £100M revenue and 500 employees, or less than £86m in assets on their balance sheet to qualify
RDEC R&D Tax Credit scheme for large businesses
The tax benefits are slightly different for the 2 schemes. Luckily, the most attractive is the SME R&D Tax Credit. More importantly, the SME R&D Tax Credit is all the more attractive for loss-making businesses, which often is the case for early-stage startups.

Is Your Startup Eligible?
As long as your business is falling under the conditions cited above (£100M revenue and 500 employees, or less than £86m in assets), it is eligible. Good news – as virtually all startups are considered as SMEs from the standpoint of these criteria.

Although R&D tax credits can only be claimed against qualifying R&D expenses, there is no limitation on the sector or industry a business is in.

As long as you can justify the R&D expenses are only related to the qualifying research and development work, you can claim expenses such as: salaries, subcontractor expenses, utilities, hardware supplies and materials cost used in research (including capital expenditures) and software hosting and infrastructure costs.

How Much Can You Actually Get?
Startups and SMEs in general can claim up to 33% of their research and development costs in cash. The percentage depends on a number of factors.

Luckily though, most startups can claim the maximum (i.e. 33%) which can significantly reduce their cash burn, and eventually, improve their runway.

For more information on UK’s R&D tax credit, how it works and how much you can actually claim for your startup, read our complete guide here.