The SME R&D tax relief scheme is available to small and medium sized companies with accounting periods beginning before 1 April 2024.
For R&D tax purposes, a company is a Small and Medium Sized Enterprise (SME) if it does not have more than 500 employees, or where its turnover does not exceed € million or its gross assets do not exceed €86 million. The consolidated worldwide group is considered in determining the size, as well as considering any linked or partner enterprises which are the subject of more detailed rules. Companies which exceed these thresholds cannot claim under the SME scheme.
A company which is not large based on the above criteria, which would ordinarily claim under the SME scheme, may need to claim under the Research and Development Expenditure Credit (RDEC) scheme in full or in part if its qualifying R&D expenditure has been wholly or partly subsidised (eg by a grant, a subsidy, or customer contributions), or where its R&D activities are contracted out to it by another entity.
Alternative schemes are available for large companies and R&D intensive SME’s. For accounting periods beginning on or after 1 April 2024, the SME and RDEC schemes have been blended to create the Merged Scheme. R&D intensive SMEs continue to enjoy enhanced support through the enhanced R&D intensive support (ERIS) scheme.
SME R&D tax relief – the tax benefit
The tax relief available to companies under the SME scheme is an additional deduction to taxable profits based on its eligible R&D expenditure. For profit making companies, this reduces taxable profits. For loss making companies, relief can be taken in the form of a payable tax credit by surrendering losses to HMRC, provided the company is a going concern.
The rates of relief available are as follows. Please note the changes in rates of relief for expenditure incurred before and after 1 April 2023.
As an example, for a profit-making company with £100,000 of qualifying R&D expenditure, prior to 1 April 2023 the company could claim an additional deduction of 130% of the qualifying R&D expenditure, £130,000. This would result in corporation tax savings of £24,700, based on a corporation tax rate of 19%.
From 1 April 2023, the company could claim an additional deduction of £86,000 against its taxable profits, based on £100,000 of qualifying R&D expenditure and an 86% enhancement rate. This would result in corporation tax savings of £21,500, based on a corporation tax rate of 25%.
For a loss-making company, prior to 1 April 2023, a tax credit of up to £33,350 could be claimed based on £100,000 of qualifying expenditure. The company still claims an additional deduction of 130% and, provided it has trading losses equal to, or in excess of, 230% of the qualifying R&D expenditure (ie £230,000), it can surrender losses of up to £230,000 at a rate of 14.5%.
From 1 April 2023, the payable tax credit is less generous, up to £18,600 based on £100,000 of qualifying R&D expenditure. The company claims an additional deduction of 86% and, provided it has trading losses equal to, or in excess of, 186% of the qualifying R&D expenditure (ie £186,000), it can surrender losses of up to £186,000 at a rate of 10%.
All payable SME tax credits are subject to a cap of £20,000 + 300% of the claimant’s total PAYE/NIC liabilities.
Due to the changes in rates of relief outlined above, it is important to distinguish between costs incurred pre-1 April 2023, and post-1 April 2023.
Eligible expenditure for SME R&D tax credit scheme
The main costs which are eligible for R&D relief are:
- The costs of employing staff who are directly engaged in carrying out the R&D itself, as well as indirect costs related to some necessary supporting and ancillary activities (eg administration or maintenance activities insofar as undertaken for R&D).
- Sub-contracted activities. Payments made to sub-contractors undertaking R&D activities contracted to them, or undertaking routine activities essential to the principal company’s R&D can be claimed, subject to a restriction to 65%. Different rules apply where the claimant and sub-contractor are connected.
- Externally provided workers. Payments made for workers provided to the claimant by a staff provider (eg agency or personal services company) can be claimed so far as those workers are engaged in undertaking R&D activities under the supervision, direction, and control of the claimant. Qualifying expenditure is restricted to 65%, although different rules apply where the claimant and staff provider are connected.
- Consumable items. Expenditure incurred on, for example, materials, or light, heat, power and water may be claimed, provided that they are consumed or transformed in the R&D process. Expenditure incurred on consumable items which form part of goods later sold or transferred as part of the company’s ordinary business cannot be included.
- Computer software. Payments for licences are claimable so far as the software is used in the R&D activities. This does not include expenditure on hardware, domains, certificates, or internet fees.
- For accounting periods beginning on or after 1 April 2023, costs of data licences and of cloud computing services (including remote data storage) are eligible so far as employed in the R&D (and subject to some cost-recouperation exclusions).
- Payments to participants of a clinical trial, provided the trial is undertaken in connection with the development of a health care treatment or procedure.
For accounting periods beginning on or after 1 April 2024, the ‘merged scheme’ implements changes to payments made to sub-contracted activities, externally provided workers, and contributions for independent R&D. Please see the factsheet linked here for further details.
How Saffery can help
Having undertaken claims for companies of all sizes from all sectors (including but not limited to manufacturing, IT, pharmaceutical, construction, food, and beverage and agricultural), Saffery ensures that claims are both maximised and robust.
Our approach is flexible and tailored to your company’s requirements to ensure that the process is cost and time efficient. Our involvement can vary from initial workshops and feasibility work, to reviewing a claim prepared by your company, to preparing the supporting claim documentation alongside you. Our work can help you to identify whether any of your company’s activities might constitute R&D for tax purposes, which scheme is appropriate to claim under, and the quantum of the claim.
Alternatively, if you have already submitted R&D tax credit claims but HMRC has opened an enquiry into your claim, we can work with you to bring this to a conclusion.
If you have any questions on the matters discussed, please get in touch with either Rachel Chappell or Ollie Bull.
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