Getting any new venture off the ground requires a healthy flow of cash, but most startups agree that finding the money to turn a great idea into a growing business can be a frustrating process.
The range of tax reliefs and incentives offered by the Government to encourage enterprise and innovation could provide a much-needed boost, but not everyone is aware of them.
We spoke with Rob Ribchester, who advises science and tech firms undertaking research and development (R&D) work. “It’s definitely worthwhile for startups in the science and tech sectors to explore the range of tax relief and support schemes available,” he said. “They can help startups make a vital step up the ladder to establishment and growth.”
Tax schemes for extra cash
There are two main types of tax relief that could help eligible science and tech startups find extra funds: schemes which make your start up a more attractive prospect to investors, and tax reliefs aimed at encouraging innovation and enterprise.
Enticing investors to fund your startup
Tech startups could attract investors through the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). These offer financial incentives, such as income tax and capital gains tax relief, to investors if they choose to back your venture. You can get confirmation that your activities will qualify for the EIS or SEIS before you approach investors through HMRC’s advance assurance scheme.
Tax relief for tech companies
Tax reliefs such as the R&D tax credit scheme enable tech companies carrying out eligible R&D work to reduce their tax bill. Companies can benefit even if they make a loss, in which case cash can be claimed from HMRC in the form of a repayable tax credit.
“Relief can amount to about 25% of the cost of wages and other expenses incurred in the course of undertaking the R&D work,” Rob explains.
Figures from HMRC suggest that more small and medium-sized enterprises (SMEs) are taking advantage of the R&D tax credit scheme. SME claims have increased from 16,005 in 2013/2014 to 18,630 in 2014/2015.
Other potential sources of financial help include the Patent Box scheme which allows companies to pay a lower rate of tax (10%) on profits generated by an EU patented invention and offers business rates reliefs for firms based in Enterprise Zones.
Getting the right tax advice
There is a lot of information available online that provides an introduction to these schemes. However, because every business is different, Rob advises getting sound expert advice as early as possible to make the most of these opportunities.
“Most significant tax reliefs apply to companies only, and not to sole traders, partnerships or LLPs,” he points out. “That means it’s important to consider the structure of the business from the beginning.”
It’s also important for businesses to understand the timings involved. For example, claims for R&D tax relief and the Patent Box are usually made after the accounting period in which the R&D has taken place, so it won’t provide upfront funding. So you’d need to have the finance for your expenditure in place first, with the hope of claiming some of it back later.
Rob also warns businesses to watch out for advisors operating in the field who ask a fee contingent on the value of the claim, before artificially inflating it in order to make more money. “There are strict penalties charged by HMRC for inaccurate claims,” he cautions.
Find out more
General information on these schemes is available from the gov.uk website, though Rob says businesses should always seek expert advice on accountancy, tax, funding and legal issues before embarking on any significant activity.