R&D Tax Credits For SMEs: Your Questions Answered

19-08-2022

By Matilda Hayward

This article answers frequently asked questions about R&D tax credits for small and medium-sized enterprises. It aims to help businesses understand if they qualify as an SME for claiming R&D tax reliefs.

What is the definition of SME?

SME means small and medium-sized enterprises. Confusingly, the UK government has more than one definition of an ‘SME’. Accordingly to the recently published Small to medium-sized enterprise (SME) action plan an SME “has fewer than 250 employees and a turnover of less than €50 million or a balance sheet total less than €43 million.” But for tax credit purposes, this definition is different (see below) It’s vital that companies know the difference otherwise the might miss out on essential R&D tax credits!

What is an SME for Research and Development (R&D) tax credit purposes?

If you’re a small/medium enterprise carrying out R&D and looking for tax relief, HMRC needs to see that you meet these R&D SME thresholds:

  • Staff headcount is less than 500
  • Turnover is less than €100m, or your balance sheets total less than €86m (regardless of your headcount).*

*You will need to convert turnover from sterling to euros.
 
If you meet these criteria, and you’re a UK limited company that’s subject to UK corporation tax, then it’s very likely that you’ll qualify. If you don’t meet these criteria, but you’re still conducting R&D, you can still look to claim under the Research and Development Expenditure Credit (RDEC).
 
A note of caution: if your company has external investors, this will likely affect your status as an SME.
 
If your SME holds over 50% of the voting rights in another company (or vice versa) then the other company is classed as a ‘connected company’. Connected companies’ staff, turnover and balance sheets must be included in your total. 
 
If your SME holds over 25% of your voting rights or capital of another company (or vice versa) then this other company is classed as a ‘partner company’. For partner companies, include a proportion of their staff, turnover and balance sheets (based on the percentage of voting rights and capital between the companies).

How much can I claim under the SME R&D tax credits scheme?

Profitable SMEs are able to deduct an extra 130% of qualifying costs from yearly profits. This is on top of the normal 100%, making a total 230% deduction.
 
If you’re not profitable, that’s also okay! If you are loss making you can claim up to 14.5% of the surrenderable loss.
 
This will give you a cash injection as a tax relief, allowing your company to continue to invest and grow. The more you spend on R&D tax projects, the bigger your tax incentive.

How far back can SME’s claim R&D tax credits?

Currently,R&D tax credits can be claimed retrospectively for the previous two accounting periods. It’s okay if you’ve already paid your corporation tax; when you make a R&D claim your company tax return will be amended and HMRC will issue you with a repayment.
 
From April 2023, companies must give HMRC advanced notice of their plan to make a claim. This must be done within 6 months of the end of the period relating to their claim (companies that have claimed in one of the preceding three periods will be exempt).

What costs are included for the SME tax credits scheme?

There are a variety of different costs that qualify for R&D relief. These include:

  • Consumables: Consumable or transformable materials used directly in carrying out R&D 
  • Salary: Money spent on employing staff directly who are actively engaged in carrying out R&D. Salaries include salaries, wages, class 1 National Insurance contributions and pension fund contributions
  • Externally provided workers (EPW): Paying a staff provider for workers who are directly and actively engaged in carrying out R&D
  • Software licences: Any software licenses used directly in carrying out R&D 
  • Sub-contractors: Paying subcontractors for activities related to R&D

From April 2023, it will also be possible to claim for cloud computing, licence payments for datasets and data analytics. 
 
Some costs can’t be claimed. These include:

  • production and distribution costs
  • capital expenditure on buildings and equipment
  • the cost of land
  • the creation of patents and trademarks.

How do I calculate my enhanced expenditure for the SME R&D tax credits scheme?

HMRC recommends 5 steps for calculating enhanced expenditure for the SME R&D tax credits scheme:

  • identify all costs that can be attributed to research and development
  • reduce costs for externally provided workers and sub contractors by 65%
  • add everything up into one figure
  • multiply that figure by 130% and you’ll have the additional deduction
  • add this this figure to the first research and development expenditure figure to receive the enhanced expenditure figure for your tax return.

What do I need to prepare for an SME R&D tax relief claim?

To put together an R&D tax relief claim you’ll need to get together some information for HMRC. This includes:

  • Detailed financial information
  • Information on your projects
  • Key contacts within your business
  • Information regarding the eligibility of your business
  • Tax computation and CT600

How much detail do I have to provide for R&D projects?

You’ll need to put together a list of your projects with details of your R&D. This information will form part of your technical report for HMRC. Within this, you’ll need to summarise how your project looked for an advance in science, overcame uncertainty and how your achievement couldn’t easily be worked out by a professional in your field. You can find out more about R&D by reading our article R&D explained: Everything You Need To Know About Research And Development.

If you’ve worked on between 1 and 3 projects, you’ll need to include the details of each project. If you’ve worked on multiple projects, you might not need to include detailed descriptions of each project. For example, if you’ve worked on 4 or more projects, you must include details of at least 3 projects to a maximum of ten projects as case studies. Your case studies must cover 50% or more of your total qualifying R&D costs.

Do SME’s need to apply for Advance Assurance?

If your SME is making its first R&D claim, it can apply for Advance Assurance, but this is not a requirement for R&D tax relief.
 
Advance Assurance lets SME’s contact HMRC before submitting an R&D claim so that companies can check if their own research and development projects qualify for tax relief. Questions can be asked during the Advance Assurance process.
 
Subsequent R&D claims will be successful as long as they are claimed within the first 3 accounting periods. They must also match what was discussed and agreed with HMRC during the Advance Assurance process.

How will I receive my SME R&D tax credit?

The SME R&D tax credit scheme allows companies to reduce taxable profits. For a profit-making company you will receive a reduction in your corporation tax bill. You can to claim up to 25p of every £1 spent on R&D projects.
 
If you are a loss-making company, you can choose to receive a cash payment in exchange for the surrender of your research and development enhanced losses or a reduction in your corporation tax from HMRC. This can be worth up to 33p for every £1 spent on R&D.

How long does it take to receive money from an SME R&D tax credit claim?

HMRC aims to make payments within 28 days for SMEs claiming research and development (R&D) tax credits.

Can sub-contractors apply for SME R&D Tax Credits?

Sub-contractors aren’t eligible for the R&D SME scheme, but they might still be able to apply for R&D Expenditure Credits (RDEC).

Can companies receiving notifiable state aid apply for SME R&D Tax Credits?

If you’re receiving notifiable state aid, you are not eligible to claim under the R&D SME scheme, but you might still be able to apply for R&D Expenditure Credits (RDEC).

How can my business claim SME R&D Tax Credits?

Our highly qualified tax and technical consultants can help you with your SME R&D Tax Credits claim.
 
Get in touch to find out how we unlock considerable savings for your business.

Keen to find out more?

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Author

Matilda Hayward

Principle Consultant