The government-run R&D tax credits incentive is designed to encourage UK companies to invest in the development of new products, processes and services, or improving existing ones. Intended to stimulate innovation in the UK, it works by either reducing the corporation tax payable or granting a tax credit for a company undertaking qualifying activities.
Awareness and uptake of R&D tax credits has grown year on year; as of 30 June 2020, HMRC had received 59,265 applications for 2018-19, compared to 19,335 just five years earlier in 2013 -14 . Whilst recognition of R&D tax credits is clearly growing, many do not realise that there are two R&D mechanisms of recovery; the SME and RDEC schemes. Regardless of which mechanism is used, a company must be eligible to pay corporation tax to benefit from the incentive.
- The Small or Medium-sized Enterprise (SME) scheme is more generous; a company can expect to receive a benefit of between 19p to 33p for every £1 spent on qualifying R&D costs (Qualifying Expenditure). In 2018-19, SME applications accounted for 88% of all R&D submissions.
- Research and Development Expenditure Credit (RDEC), whilst slightly less generous, can generate a benefit of approximately 11p for every £1 of Qualifying Expenditure.
The ability to claim under each of the mechanisms depends on various factors: a company’s size, the existence of any connected parties (the wider corporate structure) and whether the company has received any external funding (such as grants and subsidies). A key differentiator is that the SME scheme is considered notifiable state aid (of which a company can only receive one type of for each project), whereas RDEC is not.
In the simplest terms, a company is eligible under the SME scheme if it has:
- less than 500 employees; and
- an annual turnover not exceeding $100m; or
- a balance sheet total not exceeding $86m.
Given the financial thresholds are provided in euros, to assess eligibility a company needs to convert the turnover and balance sheet total to euros, using the exchange rate at the balance sheet date.
Where a company exceeds these thresholds, it would be unable to make an R&D application through the SME scheme and instead would be required to make an application through RDEC.
Unfortunately, whilst your individual company may initially appear to fit the SME criteria, you will need to consider connected parties. As such, when you are assessing whether you qualify under the SME scheme, it is important to consider a company’s wider corporate structure. Here HMRC refer to two important key terms: Linked Enterprises and Partner Enterprises. In future articles, we will discuss these key terms in more detail. We will also explore the impact of grant funding on a company’s ability to make an application under the SME and RDEC schemes.
The R&D tax credit schemes have many smaller nuances and intricacies. If you have queries about how your organisation fits into this criteria, the Apogee team are always willing to guide you through this.