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Which scheme should I apply to?
The company size test
There are two versions of the R&D tax credit scheme: the SME and RDEC schemes. Which scheme you apply for will depend primarily on the size of your company.
If you have 500 employees or less and either a turnover of less than €100 million per year or have a balance sheet of less than €86 million, you most likely can apply through the SME scheme (although there are exceptions). If you exceed these limits, then you should apply through the RDEC scheme.
Calculating your employee count
The number of employees threshold applies to the number of full-time employees you have. If you have part-time employees, then you will need to aggregate their hours to equate them to a single full-time employee. For example, if your full-time employees are contracted for 40 hours a week, two part-time workers working 20 hours a week would count as a single full-time employee.
There are a number of exceptions to the employee count, too: subcontractors, students on vocational training, apprentices, and workers on parental leave should not be counted towards your total. However, temporary employees and substitutes should.
Calculating your turnover and balance sheet
When looking at the balance sheet calculation, you will need to take your last filed company accounts. You can exclude VAT and indirect taxes from your calculation, and if your last accounting period is less than 12 months, you should annualise your results. All this work should be clearly outlined to HMRC in your R&D claim report.
The turnover and balance sheet calculations are listed in euros because they are adapted from the EU definition of an SME. Here is HMRC’s definition of an SME.
Some SMEs must apply to the RDEC scheme
Three types of SMEs need to apply through the RDEC scheme.
1. Subcontracting SMEs
SMEs who have carried out subcontracted R&D activity need to apply through the RDEC scheme for that activity. That is because the cost of subcontractors will also contribute to the contracting company’s R&D expenditure, albeit at a reduced rate. HMRC apply this limitation in order to prevent excessive subsidisation of the same activity.
2. Grant recipients
Some grants count as “notified state aid”. The most common type of notified state aid we see is Innovate UK grants.
An SME who has received notified state aid will need to apply either fully or partly through the RDEC scheme. The proportion of qualifying expenditure which needs to be claimed through the RDEC scheme will depend on the number of projects, the financial backing of those projects and the nature of the grants received. See our guide to grants and R&D tax credits for more information.
3. SMEs owned by a large company
If your SME is 25-50% owned by a larger company then that company’s assets, balance sheet and employee count will proportionately contribute to your own. For example if you’re 25% owned by a company with an annual turnover of €4million, then your turnover calculation will be €1million + your own turnover. These arrangements are called “partner enterprises”.
Additionally, if your company is more than 50% owned by a large enterprise, then the complete size of that company will apply to your calculation. This larger company will then be classified as a “linked enterprise”. For a detailed discussion of both partner and linked enterprises we recommend consulting the EU guide to defining an SME. Although be aware that the thresholds are smaller under EU rules than with HMRC.
Applying to the schemes
While the process of applying to the schemes is the same, there is an additional process of calculating your credit when applying through the RDEC scheme. You can find more information on that in our RDEC guide.
We’ve included a quick summary of the results you can expect from each scheme below.
SME Scheme
This scheme is designed to help smaller businesses with their research and development efforts.
For accounting periods on or after April 2023, small and medium-sized enterprises (SMEs) receive a percentage of their R&D expenditure. The refund ranges from 9% to 27%, with R&D-intensive SMEs having the potential to receive the full 27%. Companies falling under this category are those that allocate at least 40% of their total expenditure towards qualifying R&D activities.
For a more detailed breakdown of how much you can expect back from the SME scheme, review our guide.
Your SME credit will either be granted as a corporation tax reduction or a cash credit, depending on your financial position. It is, therefore, a below-the-line benefit and not taxable income.
Note: Companies can retrospectively claim R&D tax credits for up to two years from their current financial year-end. This means that for accounting periods prior to April 2023, companies could still claim at the higher rates applicable before the changes. For instance, a loss-making company could claim up to 33% for eligible expenditures incurred before this date.
RDEC Scheme
This scheme is designed to reward larger and some SME businesses for their research and development efforts.
For accounting periods on or after 1 April 2023, RDEC claimants receive 15% of their R&D spend back. The RDEC rate is 20%, but the credit is subject to a corporation tax of 25%, ultimately resulting in 15% benefit.
The RDEC credit is returned similarly as a cash credit or corporation tax deduction, depending on whether you are a loss-making or profit-making company. However, the important difference is that the credit is returned “above the line,” resulting in it contributing to taxable income and, therefore, visible profit.
Want more information? Read our complete guide to the RDEC R&D tax credit scheme.
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