If you’re claiming R&D Tax Credits for an accounting period starting before 1 April 2024, you’ll need to file for either SME R&D Tax Relief or the R&D expenditure credit. Which one depends on a range of factors. Let’s explore.
R&D Tax Relief is often referred to as one scheme. In reality, it’s made up of four separate regimes:
Accounting periods starting before 1 April 2024:
Accounting periods beginning on/after 1 April 2024:
Assuming you’re claiming for a period starting before 1 April 2024, you’ll need to figure out which regime to claim under.
While the two schemes primarily cater to businesses of different sizes, how large your company is is just one of several factors determining where you should apply. That’s what we’re about to explain.
It’s extremely important that you apply for R&D Tax Credits under the right scheme. If you’re in any doubt about whether you should be applying for SME R&D Tax Relief or RDEC, it’s a good idea to speak to an R&D Tax Credits specialist.
What's are the difference between SME R&D Tax Relief and RDEC?
SME R&D Tax Relief
- Caters to small and medium-sized businesses, defined by the company size test
- Provides funding via corporation tax relief and a payable cash credit
- Is the more generous scheme, offering up to 33.35% relief on qualifying costs
- Provides relief on work subcontracted to other UK-registered businesses
- Has a more generous PAYE cap, worth 300% of companies’ PAYE and NIC liability plus £20,000
RDEC
- Caters to larger businesses and some SMEs that are ineligible for the SME scheme
- Provides funding as an above-the-line cash credit
- Is less generous, offering up to 15% relief
- Does not provide relief on work contracted to other UK businesses
- Has a less generous PAYE cap, worth 100% of companies’ PAYE and NIC liability
Should I apply under the SME scheme or RDEC?
All told, there are four conditions or ‘tests’ that decide which scheme your company is eligible for.
They are:
- Are you a large company?
- Are you linked to or partnered with other businesses?
- Have you received other state aid for your development work?
- Were you subcontracted to conduct R&D by another company?
Let’s look at each of them in more detail.
Test 1: Are you a large company?
Whether you’re an SME or a large company for R&D Tax Credits purposes is determined by the company size test.
This is a simple formula that decides a company’s classification based on:
- How many employees it has
- Its annual revenue
- The size of its balance sheet
According to the company size test, you are a large company if you have:
- More than 500 employees
- Or an annual turnover of over €100 million
- And a balance sheet of over €86 million
If your business counts as a large company, then you need to apply to RDEC. Assuming you qualify for R&D Tax Credits, of course.
If your business qualifies as an SME, you need to look at the other tests to see whether you can apply for SME R&D Tax Relief.
Note these figures are in Euros, not Pounds. So remember to convert.
Also, apprentices and people on parental leave are counted differently than other employees in the size calculation.
Test 2: Are you linked to or partnered with other organisations?
If other businesses own a significant portion of your company’s shares, you may be considered ‘linked to’ or ‘partnered with’ those firms.
Linked enterprises
Under HMRC rules, your company is considered linked to another business if that business:
- 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 your company is linked to another, you must include the personnel and finances of the linked businesses, plus those of any other firms that business is linked to, when you take the company size test.
Partner enterprises
A partner enterprise is one that owns between 25% and 50% of another business. A significant share, in other words, but not a controlling stake.
If you are partnered with another company, you must add a fraction of its staff, turnover and cash balance sheet to your own when performing the SME calculation.
How much you add depends on how large a share your partner owns of your business.
For instance, 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.
Some organisations can own up to 50% of your business without being considered partners. These include institutional investors, VCs, and not-for-profit research centres like universities.
Test 3: Have you received other state aid for your development work?
The third test is whether you funded your R&D with another form of state aid.
SME R&D Tax Relief is a form of ‘notified state aid’.
This means it is type of government funding that’s been approved by the European Commission.
The EC regulates state aid to stop EU members from using subsidies to give domestic businesses a competitive advantage.
Under these regulations – which the UK is still following after Brexit – companies cannot receive more than one kind of state aid for the same work.
Therefore, if your company has received another kind of notified aid, a grant from Innovate UK, for example, it cannot claim SME tax relief for that project.
However, the RDEC scheme is not classified as notified state aid. This means your company can claim some R&D Tax Relief on state-aid-funded projects if you file through RDEC.
Things are more complicated if you receive de minimis aid or non-project-specific state aid. Or if you decide to split your claim between the two schemes.
If you’re in this position, it’s best to talk to an R&D Tax Credit specialist like GrantTree.
Test 4: Were you subcontracted to conduct R&D by another company?
HMRC has specific rules around claiming for work you subcontracted to another company.
Right now, the piece we’re concerned with is SMEs conducting R&D on behalf of another company.
If you’re an SME, you’re not allowed to claim for any expenses associated with work they’ve been subcontracted to perform by another SME.
However, SMEs can claim development costs through RDEC if they’ve been subcontracted by a large company.
In other words, if a large company contracts you to conduct development work that’s eligible for R&D Tax Credits, you may be able to claim some of your development costs back through the RDEC scheme.
The RDEC scheme does not allow companies to claim for development work that was subcontracted to a limited company, so you don’t have to worry about double claiming.
This might mean that you claim some of your R&D costs back through the RDEC scheme and others through the SME scheme.
But that can be very complicated. So if you’re in that position, you should speak to an R&D Tax Credits specialist like GrantTree.
Conclusion
There we go: the four tests that decide whether you should apply for SME R&D Tax Relief or RDEC.
To be clear, you need to apply to the RDEC scheme if you fail any of these tests.
It’s extremely important that you apply for R&D Tax Credits via the correct scheme.
If you apply to the wrong one, you could face a lengthy HMRC enquiry and possibly a fine.
If you’re not sure which of the two schemes you should apply to, it’s a good idea to talk to an R&D Tax Credits specialist like GrantTree.
Just drop us a line, and one of our specialists will be happy to help.
