A recent report highlighted the difficulties facing startups in the first months and years of operating following the news that ‘error and fraud’ within the R&D tax scheme may have cost the Treasury £4.1 billion since 2020.
Despite issues with this figure and its reporting, it has prompted HMRC to implement renewed enquiries and anti-abuse efforts – which may be disproportionately affecting small, new businesses without substantial cash reserves.
This has left many accountancy firms asking how they can best support startup clients and ensure they aren’t disadvantaged under the scheme as HMRC tackles non-compliance.
Support for startups
The R&D tax relief scheme does not specifically operate to support new startup enterprises, but it does support innovative new businesses in a sector where costs are high.
R&D projects require a significant amount of investment, and businesses take on a degree of risk when they fund work – risk which increases for startups as they tend to smaller than established businesses and have less of a trusted reputation.
With the right advice, your client can prepare a claim which covers all qualifying expenditure with an excellent technical narrative.
This not only maximises the relief for which they are eligible but minimises the chance of a post-payment enquiry or rejection from HMRC.
Enhanced relief for loss-makers
Although not all startups will be loss-makers, many new businesses make a loss within the first year or two of trading, as initial capital costs are high.
For loss-making businesses, the Enhanced R&D Intensive Support scheme (ERIS) offers more support than the main scheme, providing businesses meet the definition of an SME:
- Less than 500 staff
- A turnover of under €100 million or a balance sheet total under €86 million.
This includes the staff, turnover or balance sheets of any linked or partner enterprises.
Your client must be loss-making for tax purposes to be eligible to claim R&D tax relief under ERIS.
They can then deduct an extra 86 per cent of qualifying expenditure from trading profit for tax purposes, as well as the normal 100 per cent deduction, and claim a payable tax credit if the company has claimed relief and made a loss.
Whether your client makes a profit or a loss, the R&D tax relief scheme is an excellent route to reducing the burden of investment in innovative projects and incentivise growth.
For support with preparing your clients’ submissions and advising them on a claim, please contact our specialist consultancy team today.
