For many startup founders, the early stages of building a business are a whirlwind of creativity, problem-solving and innovation. From testing new ideas to building prototypes and developing products, startups are inherently geared toward discovery and experimentation. Yet, while innovation fuels growth, it also comes at a cost. Fortunately, the UK government recognises the challenges of funding research and development (R&D) and offers a powerful incentive: R&D tax credits.
R&D tax credits provide startups with an opportunity to recover a portion of their R&D expenses, whether as a cash refund or a reduction in corporation tax. For new entrepreneurs and first-time managing directors (MDs), the process can seem daunting, but it doesn’t have to be.
This step-by-step guide is tailored specifically for startups, breaking down the process into clear, actionable steps. Whether your business is pre-revenue, loss-making, or just starting to scale, this guide will help you unlock the financial benefits of R&D tax credits. And don’t forget that we can help you start your claim.
Why R&D tax credits matter for startups
In the fast-paced world of startups, cash flow is king. Every pound spent on innovation must deliver maximum value and R&D tax credits offer a way to stretch your budget further. Unlike traditional funding, which often involves grants or investments, R&D tax credits are retrospective - meaning they reward work you’ve already done. This makes them particularly valuable for startups that might not yet have consistent revenue streams or external funding.
But why are these credits especially useful for startups? First, they’re accessible even if you’re not yet profitable. If your startup is running at a loss, you can still claim a cash credit - a lifeline for businesses in their early stages. Second, R&D tax credits encourage you to take risks. Failed projects still qualify, so the government essentially shares the cost of experimentation. Finally, they provide a financial boost that can be reinvested into further R&D, accelerating your path to market.
Get in touch to let us help you start your R&D tax credit claim.
What makes startups unique? Early-stage challenges
For early-stage startups, limited cash flow, small teams and informal processes often make managing finances a daunting task. However, R&D tax credits offer a crucial opportunity to recover a portion of your innovation costs, even if you don’t have a dedicated finance team or accountant. Startups can simplify the process by using accessible accounting tools like QuickBooks or Xero to track expenses, keeping all receipts and invoices organised and setting up a basic system for capturing project milestones. For founders wearing multiple hats, seeking guidance from an R&D tax specialist can ensure claims are optimised without adding extra workload.
Startups without formal documentation systems can still claim R&D tax credits by creating lightweight processes to record essential information. Tools like Trello or Notion can be used to document experiments, technical challenges and outcomes, while monthly reviews of costs and activities help ensure nothing is missed. For pre-revenue startups, it’s important to understand that profitability isn’t a requirement. Even if your business is operating at a loss, you can still claim up to 14.5% of qualifying R&D costs as a cash credit, offering much-needed support during the early stages of growth.
The key is to start early and focus on capturing the right details. Whether you’re documenting attempts to solve a technical challenge or tracking software costs, the benefits of R&D tax credits can be transformative for startups navigating financial uncertainty. These credits don’t just fund innovation - they empower founders to invest in growth, take risks and focus on building solutions for the future. By addressing early-stage challenges proactively, startups can unlock the full value of R&D tax credits without being overwhelmed by the process.
Step 1: Understand what R&D Tax credits are (and why they’re perfect for startups)
At their core, R&D tax credits are designed to reward businesses for pushing boundaries. In the startup context, this often means solving technical problems, developing innovative solutions, or improving existing products in a way that involves scientific or technological uncertainty. Importantly, the scheme is open to companies of all sizes, making it ideal for startups operating with lean teams and limited resources.
Startups often qualify under the SME R&D tax credit scheme, which offers particularly generous benefits. If you’re profitable, the scheme allows you to reduce your corporation tax bill by up to 33% of eligible R&D costs. If you’re loss-making, you can receive a cash credit worth up to 14.5% of your qualifying R&D expenditure. For many startups, this means thousands - or even tens of thousands - of pounds back in your pocket.
Step 2: Know what counts as R&D for startups
Many startup founders assume that R&D is limited to lab coats and test tubes. In reality, the scope is much broader, particularly for tech-driven businesses. HMRC defines R&D as work that seeks to achieve an advance in science or technology by resolving uncertainty - something startups do every day.
Examples of startup-specific R&D activities
- Tech startups: Writing algorithms for machine learning, developing software platforms that integrate multiple APIs, or building cybersecurity tools to address emerging threats.
- Manufacturing startups: Prototyping sustainable packaging, testing alternative manufacturing processes, or creating lightweight materials for automotive or aerospace applications.
- Healthcare startups: Developing wearable health monitors, experimenting with new drug formulations, or designing robotic-assisted devices for physical therapy.
- Green energy startups: Innovating in solar panel design, creating new battery storage systems, or experimenting with methods to capture and utilise carbon emissions.
- Food and beverage startups: Formulating plant-based meat alternatives, testing preservation techniques, or developing production methods to reduce water and energy usage.
- Fashion startups: Developing sustainable fabrics, designing smart textiles, or experimenting with innovative dyeing processes that minimise chemical waste.
- EdTech startups: Developing AI-powered adaptive learning platforms, testing virtual reality educational tools, or building accessibility-focused technologies like speech recognition software.
The key is to demonstrate that your work involved technical or scientific challenges and that existing solutions weren’t readily available. Importantly, projects that fail or pivot mid-development are still eligible - a reassuring fact for startups constantly iterating on their ideas.
Step 3: Identify eligible costs (startup-specific examples)
Once you’ve identified qualifying R&D activities, the next step is to calculate the costs associated with them. As a startup, you might have fewer resources than larger companies, but that doesn’t mean your claim will be insignificant.
Common eligible costs for startups
- Staff costs include salaries, National Insurance Contributions (NICs), and pension contributions for employees directly involved in R&D, including developers, engineers, and researchers.
- Software costs: Licenses or subscriptions for tools used in R&D activities, such as prototyping platforms, data analysis tools, or specialised design software.
- Consumables: Materials and utilities used in the R&D process, such as hardware components, lab equipment, or chemicals.
- Subcontractor costs
- Testing and prototyping costs
- Training costs
- Specialist equipment: Costs for purchasing or leasing R&D-specific equipment, such as lab apparatus, specialised machinery, or testing devices.
- Cloud computing costs: Expenses for cloud services used for data analysis, simulation, or hosting development environments.
- Research materials
- Travel costs: Travel expenses for activities directly related to R&D, such as attending research facilities, testing sites, or collaboration meetings with experts.
- Patent-related costs: Certain costs associated with protecting intellectual property arising from R&D, such as initial patent searches or applications.
Startups should also track indirect costs, such as a portion of rent or utilities, if they’re attributable to R&D activities.
Step 4: Keep records without the hassle
Keeping records might not be the most glamorous part of startup life, but it’s essential for claiming R&D tax credits. HMRC requires evidence that your work qualifies as R&D, so having clear documentation will make your claim process much smoother.
Simple tips for startups
- Document the process: Keep notes on experiments, challenges and iterations. A shared document or project management tool can make this easier.
- Save financial records: Organise invoices, payroll records and receipts for all R&D-related expenses.
- Use digital tools: Free or low-cost apps can help track expenses and activities, ensuring nothing is missed.
The goal is to create a clear narrative that explains what you did, why it qualifies as R&D and how you spent your money.
Step 5: Calculate your claim as a startup
Calculating your claim might seem intimidating, but it’s manageable with the right approach. Start by adding up all your qualifying costs, then apply the relevant rate depending on your startup’s financial situation.
Simplified example for startups
- Total eligible costs: £50,000
- Profit-making startup: Corporation tax relief up to £16,500 (33% of costs).
- Loss-making startup: Cash credit up to £7,250 (14.5% of costs).
If you’re unsure about the numbers, consider using an R&D tax specialist or an online calculator designed for startups.
Step 6: Submit your claim
Startups typically submit their R&D tax credit claim as part of their corporation tax return (CT600). Alongside the return, you’ll need to provide a report explaining your R&D activities and a breakdown of eligible costs.
Tips for startup founders
- Keep it simple: Use straightforward language to describe your work - HMRC doesn’t expect overly technical jargon.
- Highlight uncertainty: Clearly explain the challenges you faced and how you overcame them.
- Get help if needed: If the process feels overwhelming, an R&D tax specialist can handle the heavy lifting.
Step 7: Avoid common mistakes
Even with the best intentions, startups can fall into common traps when claiming R&D tax credits. Here’s how to avoid them:
Startup pitfalls to watch out for
- Underclaiming: Don’t assume you’re too small or early-stage to qualify.
- Overlooking costs: Ensure you include all eligible expenses, such as software and subcontractors.
- Poor documentation: Failing to keep records can lead to delays or rejections.
Being proactive and organised will save you time and frustration.
Step 8: Reap the benefits and plan ahead
Once your claim is submitted and approved, the real benefits begin. For startups, R&D tax credits provide more than just financial relief - they offer a springboard for growth.
Using R&D tax credits strategically
- Fund new Projects: Reinvest the money into your next big idea.
- Hire talent: Expand your team with skilled professionals.
- Scale faster: Use the funds to accelerate product development or marketing efforts.
Looking ahead, set up systems to track R&D activities and expenses from the start of each project. This will make future claims even easier.
FAQs for startups and R&D tax credits
Do startups qualify even if they’re not profitable?
Yes. Loss-making startups can receive a cash credit instead of a tax reduction.
What if I don’t have an accountant?
That’s fine. Many startups handle claims themselves or work with R&D tax specialists who simplify the process.
Can I still claim if I received a grant?
Yes, but the grant might reduce the amount you can claim. A specialist can help you navigate this.
Don’t forget to get in touch to let us help you start your R&D tax credit claim.