The extra incentive to innovate

Innovation frequently appears on and rightly so - whether it relates to a product, service or internal process, this is the factor that often gives start-ups an edge over competitors in their market. When you're allocating funds to innovation, you'll probably call it by its more prosaic name 'research and development' (or R&D) - and the chances are there will be end up being a wince-inducing figure next to it on your profit and loss sheet.

A bona fide R&D project involves significant financial risk because, by its very nature, there's no way of knowing whether or not it will be a success. Equally, the dividend could have the potential to be huge in commercial terms. The British government recognises this dilemma for businesses and offers an incentive to companies who commit to R&D by offering tax relief on the funds invested.

As the MD of a company that's committed to saving small businesses money, I feel it's my duty to tell you this - especially since I can offer first-hand evidence that the system actually works.

At Make It Cheaper, we recently made a large investment to make significant improvements to our internal systems. The aim was to give customers instant, accurate, tailored information about their switching options, which is subject to a number of variables from a multitude of sources, including live information from suppliers, distribution networks and credit-scoring companies.

The complexity of the task meant that we had to spend money before we had any idea how and if it was going to work (research) and a lot more money before we were fully confident of its success (development). As such, we made a very compelling case for relief qualification and ultimately achieved a positive outcome, including a cheque from Her Majesty's Revenue and Customs.

To qualify, you'll have to demonstrate that your project 'seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty.' There's an opportunity here if you have a future project in mind, but you can also make a retrospective case up to two years after the financial year in which you incurred the R&D costs. Start-ups should be particularly proactive because if you're posting a loss in the financial year of your project, your loss for corporation tax purposes to be set against future profits will be enhanced by 100% of your R&D expenditure.

If you do decide to go ahead, you will need to describe your project and the costs involved in precise technical and financial terms. There are specialist agencies that can help with this - and you'll definitely need a good accountant to submit your case to the tax service. Get it right and you'll access crucial funds towards your next innovation.

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