These FAQ were answered by Max Smith, Tax Relief Partner at Catax, in response to some of the questions that were asked during the How to Raise Money for Your Startup Without Giving Away Equity Webinar that you can download here.
How does Research & Development (R&D) tax relief and grant funding work, is this on a no win no fee basis?
For R&D tax relief, Catax works on a contingent fee basis. This means that if we cannot secure your company a benefit, then there is nothing to pay. As part of our discovery process, we will explore your R&D projects and align on a fee for the work we will undertake. Our Grants Services model works slightly differently. Due to the workload being very front-end heavy, we charge a Grant Bid Writing fee of between £3,000 – £5,000. There will then be a success fee based on the amount of grant funding that we secure the company. In the UK, grant funding can be as high £2m.
What is Catax average success fee and fee structure for both tax relief and grant scheme?
On average, Catax will secure a benefit of £67,000 for our R&D clients and £53,000 for our Capital Allowances clients. Our fee structure will always be a % of the Capital Allowances we identify for our clients. This percentage will be discussed with the client as part of the discovery process. Grants Services fees are structured as an upfront bid writing fee and success fee based on the total amount of grant funding awarded.
Can a start-up pre-revenue claim relief on R&D or do you need a certain amount of turnover/income?
To qualify for R&D relief, you must be a going concern (trading and subject to Corporation Tax, therefore not a sole trader or partnership) and you must be drawing your accounts according to generally accepted accounting principles (GAAP), or a similar standard. The entity can be profitable or loss-making and can be pre-revenue as long as the R&D is undertaken in respect of a future trading activity.
What is the time lag between submission of an R&D tax claim and the payment by HMRC? And what is the impact of Covid-19, does this mean there are more delays?
Depending on the type of benefit (payable tax credit or computational adjustment), the length of time will differ from when a claim is submitted.
HMRC are entitled to a 28-day period before reaching a decision over a tax credit. However, in our experience, it is rare that this has been exercised and usually a decision is made, and the funds released within 1-2 weeks of submission. If you are looking at a computational adjustment then it may take longer to reap the benefit – although this option is calculated at a higher rate.
HMRC remain committed to driving through R&D tax relief claims because of how important continued innovation is to our economic health. To date this year, Catax has witnessed no delays with HMRC’s processing timescales, regardless of COVID-19.
How does the R&D tax relief work cross country?
The R&D scheme in the UK applies to UK-registered companies only; however, not everyone employed by the company need work within this country.
Similarly, if qualifying work has been outsourced to an overseas contractor then this will not in any way disqualify the work or the costs associated to it. But, be mindful that there are additional rules governing whether the developer is a separate entity or employed by the same company because they may have an impact on how much of the costs can be included in the claim.
How does patent box affect R&D relief?
Despite generally being closely associated with each other, the two schemes are independent when it comes to benefits, claiming, etc. If the company has patents
or is applying for UK patents, then the R&D expenditure incurred in establishing those patents is likely to be qualifying expenditure for R&D purposes.
What are the different sectors that are eligible for R&D tax relief?
The scheme was designed to be as accessible as possible, to the largest volume of sectors, because it is fundamentally a government vehicle to drive domestic innovation and growth, rather than waiting for another country to establish the same solution or product.
Does the R&D automatically come off the corporation tax and tax relief if my accountant submits it as part of end of year accounts?
There is a section within the CT600 form (summary of the Corporation Tax Computation for the accounting period) specifically for R&D amounts; however, we would always advise consulting with a specialist first before including this figure, so that a report outlining what the figure relates to can be produced.
Can you apply for grant funding before investing money into the project or is it only after that you’ve invested money that you can claim it back? And if you are in receipt of an innovation grant, can you also claim R&D tax credits?
You don’t need to have already spent money on a project in order to apply for a grant. You cannot start the project until the grant is awarded, and it is generally claimed back quarterly in arrears. Start-ups with no revenue or investment can apply for funding. You will have to give the assessor confidence that you can fund the cashflow of the project, and your contribution; which for an SME is around 30%.
R&D Tax Credits can still be claimed for if a company has received grant funding, however, the claim will be submitted under the larger company (RDEC) scheme, where the financial benefits are not as lucrative (currently 13% of qualifying expenditure which is then subject to 19% Corporation Tax).
Can the funding be used to hire people?
You can bring in resources for a particular project (either an external organisation or staff), however:
1. You would need to show in the application that you are going to recruit someone in time for that role in the project (so as not to cause a delay), and
2. You can only claim for the portion of staff time actually spent on the project – so if a full time employee works 20% of their time on a project, then you can only claim 20% of that cost.
Curious to learn more about this topic? If you are thinking about raising capital, but don’t want to give away a slice of your business, we advice you to download this on-demand webinar. In it we discuss the world of tax reliefs and grants that are out there to help you raise funds for your R&D.