Pairing R&D tax credits with public funding incentives

If you are an entrepreneur and love to venture into the unknown and push the boundaries of technology, then mixing R&D tax credits with the Seed Enterprise Investment Scheme (SEIS) could provide you with a large part of your early-stage funding requirements.

Individually, both the R&D tax credits scheme and the Seed Enterprise Investment Scheme (SEIS) are very generous. However, when they are combined, they make an incredible funding opportunity for innovative companies.

Government funding incentives currently available for UK start-ups

SEIS complements the Enterprise Investment Scheme (EIS), which offers tax relief to investors in more established companies. SEIS is designed to help small, early-stage companies raise equity finance by offering investors tax-efficient benefits in return for investment. The entrepreneur must be prepared to exchange equity for capital funding.

The Small Companies Enterprise Centre (SCEC) decides if a company and a share issue qualify. If the company, its activities, and shares all meet the requirements of SEIS, SCEC issues the company with a certificate and supplies claim forms for the company to send to its investors, so that they can claim tax relief.

To qualify for SEIS, a company must:

  • Be based in the UK;
  • Have fewer than 25 employees;
  • Be no more than 2 years old;
  • Have assets of less than £200,000; and,
  • Trade in an approved sector (generally not in finance or investment).

Through SEIS investment, a company can raise no more than £150,000 in total. SEIS investors can invest a maximum of £100,000 in a single tax year. This can be spread over a number of companies. Investors can hold up to a 30% stake in each start-up. No capital gains tax is paid on profits earned on shares held for more than three years. If the SEIS investment makes a loss, the investor will also be able to offset the capital loss against income. HMRC operates an Advance Assurance facility which certifies that at the time of application, the business was SEIS-compliant.

How can you achieve public funding for your innovative start-up business?

Combined with an R&D tax relief claim, you can achieve a large part of your early funding requirements with SEIS. To do this, you will need 4 investors to invest £37,500 each, for a total investment of £150,000. Each will receive a 25% share in the company in return. Under SEIS, each investor can reclaim 50% income tax on their investment through their self-assessment return, regardless of their tax rate. This allows each investor to reclaim £18,750 of income tax relief.

You will then invest the £150,000 in qualifying R&D activities and make your R&D tax credits claim. Many start-up businesses don’t claim their R&D tax credit entitlement, because they think that the scheme doesn’t apply to them, or because they are reluctant to approach HMRC, who administer the scheme.

To make the process of claiming your R&D tax credit entitlement easier, it is worth speaking to an R&D tax credits specialist to help you recover up to 33% of your development expenditure. You can benefit from R&D tax credits whether your business is making a profit or a loss. Loss-making businesses can claim an R&D tax credit payable (cash) amount from HMRC, while profit-making businesses can significantly reduce their corporation tax bill. You can then reinvest your tax credit payable or corporation tax savings back into the business to support further development activities.

How the changes to R&D tax relief could save SMEs money

In the Spring Budget, Philip Hammond, Chancellor of the Exchequer, announced plans to simplify the R&D tax scheme. “[T]o make the UK even more attractive for R&D we have accepted industry calls for a reduction in administrative burdens around the scheme and will shortly bring forward measures to deliver them.”

Although the details about the scheme’s simplification have yet to be announced, any reduction in the administrative burden of R&D tax claims will be very welcome, especially for small businesses and start-ups, where cash flow is essential.

What types of digital innovation projects qualify for R&D tax relief?

Common types of software development and digital innovation projects that may qualify for R&D tax relief include:

  • State-of-the-art software for new projects, or new functionality for existing R&D projects.
  • Tools to extend the functionality of software applications or an operating system.
  • Extensions to database software, programming languages, or operating systems.
  • Software development tools, such as tools to port data across platforms, and tools for image processing and character recognition.
  • Novel data management techniques, such as new object representations and new data structures.
  • Innovative methods of capturing, transmitting, manipulating, and protecting data.
  • Software to run new computer hardware.
  • Software to run on devices with pre-installed operating systems, such as handheld GPS, mobile phones, and tablets.
  • Means of integrating hardware and software platforms.

R&D tax relief is designed to reward innovation, which is vital to the UK’s economic prosperity. Announcements made in the Spring Budget included plans for the £23bn of additional infrastructure and innovation investment, including £270 million to keep the UK at the forefront of disruptive technologies like biotech, robotic systems and driverless vehicles, and £16 million for a new 5G mobile technology hub.

If your company has been tackling innovative projects but hasn’t yet claimed R&D tax credits, there’s no better time to make your claim. For a start-up or young small business, combining your R&D tax credits claim with SEIS will result in an even better funding opportunity.