There’s no doubt setting up a new company is an administrative headache. Once the compliance work for Companies House is sorted, you have to address the laws and rules associated with employing people – including the mind-numbing complexity of pensions auto-enrolment – and source various insurances.
An optional administrative burden that, with hindsight, we’ve discovered is well worth taking on, comes in the form of the various schemes open to technology/innovation businesses – including two enterprise investment schemes and research and development tax relief.
Unless you have the luxury of offloading things to professional advisers, it’s vital to research and understand the schemes open to young, innovative businesses in order to make yourself as attractive as possible to investors and be treated as favourably as possible from a tax perspective.
When we set up Untangl.co.uk in 2015, our knowledge of the Enterprise Investment Schemes and R&D tax relief was limited to having heard of them. Our plan was to build a new technology platform that would help smaller employers apply for and run employee benefits packages. Our objectives were simple:
– We needed to create a really simple way to enable employers to upload their employee data – wherever it’s stored and whatever state it’s in
– We needed to work with leading benefit suppliers to use this data to present real time quotes showing the costs of a benefits package so an employer could make an instant decision to purchase
– Sign up needed be online and captured in a single process – no more paper forms and duplicated data entry and this should take a few minutes to complete, at most.
We weren’t sure which, if any, of the tax schemes and reliefs would apply to us and so set about reading and researching them, using HMRC’s own site as well as a number of other blogs and articles on the subject.
SEIS & EIS
The Seed Enterprise Investment Scheme (SEIS) helps startups raise equity finance by offering tax relief to the individual investors who buy shares in that business. It complements the Enterprise Investment Scheme (EIS) which offers tax relief to those willing to invest in higher risk small companies. It is expected that companies will go on to use EIS after an initial investment under SEIS.
Related: Why should entrepreneurs care about EIS and SEIS?
R&D tax relief
Companies can claim for expenditure – including staff salaries – on R&D projects that meet the guidelines on the meaning of research and development. The guidelines are relatively comprehensive and the definition of research and development is quite straightforward – a project must seek an advance in science or technology, and the project must seek to resolve scientific or technological uncertainty to achieve this advance. This cash recovery can be a lifeline for small, innovative businesses.
Our experience
Our initial focus was on getting SEIS in place so we could approach early stage funders and angel investors. The first time around, we didn’t really understand the rules and we made some incorrect assumptions which meant our application failed.
Although this was a blow, it was a wake up call that we needed some specialist help. With that expert support, we submitted an application for EIS which was successful and enabled us to get our first investors on board.
We then decided to apply for R&D tax relief as we believed we were working on an eligible project. This involved extensive reading and research, and took a couple of weeks of solid work to get our application written and submitted. Technological nous is key for a successful submission, so get your developers to assist.
In our view, it’s important to do the early research yourself. You will know the detail about what your are developing and you don’t want to rely on someone else’s interpretation only to get rejected.
We wouldn’t have got our early investors on board without EIS and the R&D tax relief has really improved cash flow.
Our top five tips
– Read the HMRC guidance and make sure you understand the key points.
– Leave plenty of time to do the paperwork – it’s not simple and needs thought and care.
– Enlist the help of an expert who has a strong track record of successful submissions for other start ups and make sure you agree the fees upfront.
– But be careful about handing over the whole thing to someone else, especially if you don’t know them and/or they have not been recommended. You should have input throughout the application process because your knowledge and interpretation is unique and invaluable.
– R&D claims should focus on technology and finance – not the product or service quality. Use your staff’s expertise and bring their skills and knowledge together to draft your claim.
Richard Stewart is founder of Untangl.co.uk.
Further reading on R&D tax relief
