Are you an SME or a large company for R&D Tax Credits purposes? Working this out is a crucial part of your claim, but it can be extremely confusing.
When it comes to R&D Tax Credits, HMRC says eligible businesses come in two sizes: SME (small and medium-sized enterprises) and large.
Working out your company’s size is an essential part of claiming R&D Tax Credits.
It is one of the main factors deciding whether you are eligible for SME R&D Tax Relief or the much less generous Research and Development expenditure credit (RDEC).
But working out what size you are can also be pretty confusing. Especially if you’ve recently received investment.
To clear things up, GrantTree’s R&D Tax Credits experts have broken the key things you need to know to work it out for yourself.
If you have any questions, just drop us a line. Our experts would be happy to help.
SME vs large company - the calculation
The UK government defines of a large company (for R&D tax purposes) is one with either:
- More than 500 employees
- Or an annual turnover of over €100 million
- And a balance sheet of over €86 million
A business below these thresholds qualifies as an SME.
Note: these figures are in Euros, to remember to convert to pounds.
Be careful, though. This calculation isn’t as simple as it looks.
There are a few extra variables you need to consider when working out your company’s size.
How many employees do I really have?
Calculating the number of employees isn’t as straightforward as looking at how many people are on your payroll.
Two kinds of employees don’t contribute to your employee headcount. They are:
- Employees on parental leave
- Apprentices
It’s important to account for these omissions when calculating your employee total.
Now that apprentices are a significant part of the workforce, it could have a sizeable impact on your calculation and the amount you can claim.
Also, you may have to add some or all of the staff from your investors to your own headcount.
Changing size during your financial year
There are two ways your business can change its size:
- Shares in your company are acquired by outside investors
- Your company changes size organically
- Your company is sold by a larger business
What happens to your classification is different in each scenario.
1. Outside investors buy shares in your company
If an outside investor purchases shares in your business, it could have a significant impact on your R&D Tax Credits claim.
It all depends on whether you and the investor are considered ‘linked’ or ‘partner’ enterprises after the transaction.
More on linked and partner enterprises here.
You can learn more about linked and partner enterprises. But here’s a quick overview.
Linked enterprises
You and your investor will be ‘linked enterprises’ if the investor:
- Owns more than 50% of your company’s voting rights
- Can appoint or remove a majority of your management team
- Can exert a “dominant influence” over your company
If you are linked, you will need to apply the company size test to the combined staff, revenue and balance sheet of your company and those of your investor.
Partner enterprises
You will be considered ‘partner enterprises’ if your investor owns between 25% and 50% of your company.
If you are partnered, you’ll have to add a fraction of your investor’s staff, turnover and balance sheet to your own when taking the company size test.
How much you add depends on how large a share your partner owns of your business.
If your partner owns 25% of your company’s shares, you’ll add a quarter of its staff and assets. If it owns 50%, you’ll add half.
Thankfully, a range of companies do not qualify as partners, even if they meet the shareholding requirement. These include VC firms, research institutions, and not-for-profits.
How this affects your R&D Tax Relief claim
Being a linked or partner enterprise can easily tip you into the large company bracket, meaning you will no longer qualify for the more generous SME R&D Tax Relief scheme.
Whatsmore, under HMRC rules, you will be considered a large company for the whole of the accounting period in which the acquisition took place.
So you cannot claim SME R&D Tax Relief on expenditure made before the acquisition.
If you retain control, however, the calculation relates only to your business.
Note: This doesn’t work in reverse. In other words, if you become ‘unlinked’ or ‘unpartnered’ from another company, you won’t necessarily qualify for SME R&D Tax Relief that same financial year.
More on that below.
2. You change size organically
If your company changes size organically, it will not be instantly reclassified as an SME or a large company.
There’s a two-year transition period during which your company’s classification won’t change.
That means if your company changes organically from an SME to a large company, or vice versa, your company will only officially change size – and therefore the tax credits scheme it qualifies for – at the beginning of the third financial year.
Your company needs to have remained eligible for its new classification for two consecutive financial years to qualify for a change in status.
3. Your company is sold by a larger business
If your company is sold by a large business, and the spun-out entity is autonomous, then the two-year transition period takes effect.
So, if the new now qualifies for SME status via the company size test, then it will only receive SME status in the third financial year.
Assuming it doesn’t change size in its second financial year, of course.
What happens if I make a mistake?
As you can see, working out whether you are an SME or a large company is a little more complicated than looking at payroll data.
Still, deciding which of the two R&D Tax Credits schemes you qualify for is a vital part of the application process.
Get it right, and it should be smooth sailing for your application.
Get it wrong, however, and you might receive a fine or face a lengthy HMRC enquiry that could delay your R&D Tax Credits funding by months or even years.
If you’re unsure about which scheme you should apply for, our R&D Tax Credits experts would be happy to point you in the right direction.
Just get in touch, and our tax experts will be right with you.
