R&D Tax Credits: Is my client's company an SME or not?
The general meaning of an SME, and what an SME is in relation to R&D Tax Credits, are slightly different. So if you’re using the Tax Cloud portal for accountants to help your clients make and maximise their claim, it’s certainly worth understanding the essentials.
An SME in general terms
The UK generally says that a small or medium-sized enterprise will have no more than 250 employees. It will also have a turnover of under €50 million, or a balance sheet total of €43 million or less.
R&D Tax Credits: A quick overview
Business innovation and growth are the backbone of the UK. Addressing scientific and technological challenges and carrying out experimental work is what turns SMEs into larger, market-leading companies. The company itself benefits, and the wider economy benefits too, through extra skills, lower unemployment and more tax revenue.
But the government also recognises that the cost of scientific and technological R&D can, for many businesses, be prohibitively expensive. So in the early 2000s, it launched the R&D Tax Credits scheme, which helps to cover some of the expense.
Essentially, companies engaging in qualifying innovative activities can apply to HMRC for a tax rebate (or a cash lump sum if the company is loss-making) of up to 33% of the costs. The real beauty too is that any UK company of any size, shape or sector can apply. And as the scope of eligible projects and costs (including staff wages, overheads and prototype development) is incredibly broad, even the smallest claims can easily run into many thousands of pounds.
Money reclaimed through R&D Tax Credits can be spent by the company on anything at all, although many decide to reinvest it back into R&D work.
So why does size matter when it comes to claiming R&D Tax Credits?
The R&D Tax Credits scheme itself is divided into two branches. One is for small and medium sized companies (rather aptly named the SME scheme) and the other branch is called RDEC, which is short for Research and Development Expenditure Credit. RDEC tends to be used by much larger companies, although some SMEs may also use it if they have previously received state aid. This might be particularly relevant if your client used the Coronavirus Job Retention Scheme for example.
While we’re on the subject: A note about R&D Tax Credits and the CJRS
During the pandemic in 2020 and 2021, huge numbers of UK companies benefitted from the government’s Coronavirus Job Retention Scheme (CJRS), in addition to the Coronavirus Statutory Sick Pay Rebate Scheme.
The Myriad Associates team (developers of Tax Cloud) has put together a short YouTube video to explain about eligible costs and how the various coronavirus supports may affect your clients’ claim.
Which branch of the scheme applies to my client?
Generally speaking, a company should claim under the SME branch of the scheme if it has:
- 500 employees or fewer (note this is twice as many as the standard definition of an SME that we looked at earlier. It’s good because it means even more (slightly bigger) companies can benefit from the more generous rate offered by the SME scheme compared to RDEC.
- A turnover of under €100 million or
- Gross assets of less than €86 million.
Larger companies - i.e ones that are higher than these thresholds - will need to use RDEC. The RDEC rate is currently 13%, which is lower than that provided by the SME scheme but claims are typically far more substantial.
How much R&D tax relief could a profitable SME get?
The SME branch of the R&D Tax Credit scheme allows an additional 130% of qualifying R&D expenditure to be deducted when working out the company’s profits.
Exactly how much your client’s company can claim depends on the R&D activities and costs it has incurred. But as a guide, £500,000 of R&D expenditure could net your client up to £123,500 as a tax rebate or reduced tax liability.
This is how we worked it out:
£500,000 (your estimated R&D spend) x 130% (enhancement rate) = £650,000 x 19% (Corporation Tax rate) = £123,500 (enhanced expenditure)
£123,500/£500,000 = 25% (this is the profit-making SME rate)
Loss-making SMEs can claim R&D Tax Credits too
SMEs that have made a loss won’t be able to claim a corporation tax rebate so will instead receive the award as a cash credit at 33%. So going back to our example above, if a loss-making company spends £500,000 on eligible R&D, it could claim a tax credit of up to £166,750.
Struggling a little?
Panic not. The Tax Cloud portal for accountants means you can easily make an accurate, maximised R&D Tax Credits claim on your client’s behalf.
Created by the R&D tax experts at Myriad Associates, simply sign up and follow each step to input their eligible costs and figures. You then complete the technical report based on your client’s own information, and once everything’s checked through for you it gets sent straight the HMRC.
When you first begin, a member of our team will check your clients’ claim to advise whether the SME branch or RDEC is most appropriate. We’ll also go through their project in detail, checking to confirm whether their work and their costs are definitely eligible. That way, you know you’re not wasting time.
While you’re going through the stages of claiming, the team is also on hand with any questions. It’s like having your own R&D expert without having to take anyone on in-house.
A better service for your clients, whilst also expanding your firm’s reputation - what’s not to like?
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Tax Cloud is an R&D Tax Credits claim portal.