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How do R&D tax credits reduce financial barriers to innovation for tech start-ups?

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Author: Tom Mason

Innovation is a key part of being successful in the tech sector, but for start-ups, achieving this comes with significant financial barriers.

After all, developing cutting-edge technologies, software, or systems not only demands creativity but also a substantial investment.

However, R&D tax credits offer a solution to reducing financial barriers and empowering start-ups to pursue ambitious projects.

We provide R&D help for accountants, so you can provide expert guidance and support to your tech clients on making the most of the opportunities available to them.

Easing the financial strain of innovation

We are all aware that innovative projects can be costly. From testing new ideas to prototyping solutions, the expenses add up quickly, often making it difficult for start-ups to move forward without financial relief.

R&D tax credits provide that relief by allowing companies to reclaim a portion of their qualifying expenditure.

For example, if a tech start-up is designing a new cybersecurity platform to address emerging threats, they can recover a portion of their costs – whether it’s for coding expertise, state-of-the-art encryption tools, or high-performance servers.

This helps to free up essential resources, allowing these companies to sustain their projects and continue innovating.

Reinvestment in growth for tech start-ups

R&D tax credits also open up opportunities for reinvestment in growth.

By recovering a portion of their R&D costs, businesses can:

  • Hire new skilled developers, engineers, or data scientists to boost their innovation efforts.
  • Invest in advanced infrastructure, like cloud computing resources, to support growth.
  • Allocate funds to marketing or operational activities that help position the company for broader reach.

This reinvestment capability allows start-ups to accelerate their development and achieve long-term growth more quickly and sustainably than they could without the credits.

Encouraging innovation in the tech industry

One of the biggest barriers to business being willing to push boundaries and test unproven concepts are the risks it poses.

  • What if the project fails?
  • What if the market rejects it?
  • What if we don’t have enough resources?

All of these are valid concerns, but R&D tax credits do provide a safety net, encouraging start-ups to experiment boldly without the fear of catastrophic financial loss.

Even if a project doesn’t achieve its intended outcomes, qualifying activities can still be claimed, ensuring companies are not penalised for their ambition.

Additional support for innovation with ERIS

Tech start-ups are often ideal candidates for the new Enhanced R&D Intensive Support (ERIS) scheme.

Designed for loss-making SMEs that dedicate at least 30 per cent of their total spending to R&D, ERIS provides a much-needed financial boost, helping businesses stay focused on pushing boundaries without being held back by costs.

With an 86 per cent enhancement to qualifying R&D costs and the ability to claim back 14.5 per cent of losses as a tax credit, ERIS offers a net benefit of around 27 per cent.

Crucially, ERIS offers flexibility with a grace period for businesses temporarily falling below the R&D intensity threshold, ensuring that short-term dips don’t derail their access to this valuable support.

To discover how our R&D tax consultants can support your firm and enhance the service you provide to tech start-ups, get in touch today.