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 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.
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.
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. You can find HMRC’s definition outlined here.
SMEs which must apply to the RDEC scheme
Three types of SMEs need to apply through the RDEC scheme. Firstly, SMEs who have carried out subcontracted R&D activity need to apply through the RDEC scheme. This is because subcontractors can also form the partial cost profile of the contracting company’s R&D credit application. HMRC apply this limitation in order to prevent multiple claims for the same activity.
Secondly, SMEs who have received notified state aid (most typically in the form of an Innovate UK grant) will need to apply either fully or partly through the RDEC scheme. The proportion of their 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 recieved.
Thirdly, if your small company 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 you 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.
This scheme is designed to help smaller businesses with their research and development efforts.
SME claimants receive between 18-33% of their R&D spend back.
For a more detailed breakdown of how much you can expect back from the SME scheme, have a look over 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.
This scheme is designed to reward larger and some SME businesses for their research and development efforts.
RDEC claimants receive 13% of their R&D spend back, but the credit is subject to corporation tax of 19%.
Typically this means that you’ll receive 11p back from every £1 that you spend on R&D.
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.
For more information on the RDEC scheme read our complete RDEC guide.
RDEC Scheme Guide
The complete guide to compiling and submitting an RDEC claim. Includes an explanation of differences between the two schemes.
Government Funding Guide
A breakdown of the different types of government funding available to innovative businesses in the UK. Includes Coronavirus response funding.
Software Development R&D Tax Credit Claims
Key insights into claiming R&D tax credits for software development projects.
Clarifying the Impact of CBILS on R&D Tax Credits
How the government's Coronavirus loan scheme affects your ability to claim.
Which costs qualify for R&D?
A breakdown of the types of costs that can be included in your claim.
EmpowerRD Covid-19 response
How we're helping businesses with their cash flow during the downturn.
Is my business eligible for R&D tax credits?
Find out if the activity undertaken by your business can qualify as R&D.
How much can I claim?
Read how different accounting positions can affect how much you're able to claim.
What evidence is required to make an R&D claim?
Learn about the different pieces of evidence required for different R&D costs.
The most common queries we hear about the R&D scheme.