In their pre-trading phase, the founders of new ventures in Life Sciences or any other sector need to keep a laser-like focus on the feasibility of their new product or service. With tests to design, investors to court, and expenses to fund – from prototyping and consumables to software and staffing – there are other plates to keep spinning too.
So, perhaps it’s understandable that a very different test of feasibility – for recovering those costs through tax credits – may not be seen as an early priority, especially if the research project may qualify for a grant from Innovate UK or other sources of state aid. The temptation may be to get that application in first, and put off any consideration of tax rebates until later, even though this may not be in the best financial interests of the project and the company.
Although in the Life Sciences sector the purpose and generosity of the UK’s R&D Tax Credits regime are generally well understood, some pioneering companies are missing out. Decisions are being taken by fledgling companies long before they start trading that compromise their ability to make the most of the government’s financial incentives for innovation.
As a Pharmaceutical Scientist who has spent years working in research and process development, I understand the high hopes and pressures within these early-stage businesses. Now an R&D Tax Consultant working within a team of specialists in this area, my work involves helping research teams and entrepreneurs make informed decisions that optimise their R&D funding and ongoing tax claims.
To understand what’s at stake doesn’t take a complex tax lesson. Instead, here are eight simple Do’s and Don’ts about R&D tax relief for any pre-trading business, whether it’s in Pharmaceuticals, Biotechnology, or indeed, any segment of UK industry:
- Do consider the trade-off between R&D grants and tax credits: A government grant for innovation could be a lifeline, but think twice before you grab it. The rules on state aid mean that SMEs who benefit from some innovation grants can only claim R&D Tax Credits on the same project at a lower rate. Generally, you will get back just 10% of eligible expenditure, rather than up to 33%, so it’s important to choose an advisor who understands the nuances.
- Don’t under-estimate the value of your R&D tax incentive: The spending that qualifies for R&D credits may be far higher than you expect, especially in Life Sciences where expanding knowledge and solving technological challenges is of the essence, and a higher proportion of costs is likely to attract relief.
- Do bear in mind that you may claim R&D Tax Credits for pre-trading expenditure: The accounting treatment of any pre-trading expenditure, once your company starts trading, is an important area that needs to be considered. Your pre-launch costs are potentially eligible.
- Don’t forget the time limit on retrospective claims: Taking advice early is imperative, not only because you need to know whether grant aid or R&D Tax Relief will be better for your business. Remember there’s also a time limit on retrospective claims for making R&D tax claims of two previous financial periods.
- Do take advantage of strategic advice to optimise your tax efficiency: Your company structure, framing of contracts with subcontractors, how you remunerate your directors and employees, and the location and outsourcing of research work can all have ramifications for the future value of R&D tax relief.
- Don’t sign an exclusive fixed-term consultancy contract: A reputable R&D tax consultancy won’t tie you in to a fixed-term contract, so you have nothing to lose by getting an early feasibility assessment as you will still be free to change tax advisor at any point.
- Do establish a relationship of trust to underpin future R&D tax claims: Critical though this pre-launch phase of your business may be, there is a long-term benefit from taking R&D tax advice now. Even if there is little or no basis for an imminent claim, knowledge about your business gained by your R&D tax advisor in these early stages will inform future claims and help optimise their quantum; both sides benefit by developing a long-term relationship.
- Don’t think that a feasibility study for R&D Tax Credits will break the bank: There should be no need to strain your cashflow any further. Our approach to charging, including pre-trading feasibility studies, is flexible.
To sum up, early-stage ventures should take early advice on R&D tax matters: to learn whether grants or tax credits will be more beneficial, to inform business decisions that will affect entitlement to tax relief, and to pave the way for a flow of optimised credits.
A feasibility study could be crucial to future funding of your innovation.
New ventures and innovation are high-risk. One risk you can readily minimise is the opportunity cost from failing to optimise your company’s R&D tax position.
By taking early and strategic advice from Liberty Collins, you benefit from specialist expertise and a service that’s quality-assured and personalised to suit your needs. We will tell you what you need to know – free of jargon, in a language that you and your colleagues understand.
So you’re free to focus on innovation and making your business a sustainable success.
If you’d like any advice, our qualified team are happy to help, please get in touch via our contact page.
Written by: Younes Hassanpour