Changing status from SME to large company and vice versa
If you are part of a company that is claiming R&D Tax Credits, you will know that when it comes to assessing your company’s size, it matters. Whether you are an SME (small or medium company) or large company (RDEC) impacts dramatically on how much you can claim, what you can claim for and the process of the claim itself. Time to find out how making the change from an SME to a large company (or vice versa) under different circumstances will affect your future claims.
HMRC’s criteria for an SME for the purposes of R&D Tax Credits are:
• less than 500 employees, as well as either:
• an annual turnover under €100 million, or
• a balance sheet under €86 million
But what if your company exceeds one of these thresholds during a financial year? There are a couple of different situations where this could happen, and they have different rules.
SME to large company
1) Your company is acquired by another company that is large, or that is part of a group that, when considered together (as in consolidated accounts) is large by HMRC’s definition.
2) You organically grow to exceed the threshold
Acquired by another company:
In the first case of being acquired by a large company or group, if the acquisition results in a transfer of control to the large entity (i.e. it is no longer autonomous), then you must take into account the numbers relating to the partner or linked enterprises.
HMRC states that if, when the partner or linked enterprises are also taken into account, you exceed the SME thresholds, you will be considered a large company for the purposes of R&D Tax Credits for the whole of the accounting period in which the acquisition occurred. In this case, none of your expenses can be claimed under the more generous SME scheme (with a benefit of up to 33% of expenditure), but rather, must be claimed under the RDEC scheme (with benefit of up to 8% of expenditure).
As an example:
Company A has a financial period spanning January to December, and has 480 employees and a turnover of £30m in year one. If Company B, which has 1000 employees, buys 80% of the shares and thereby takes over control of company A in October of year 1, Company A will have to consider company B’s staff headcount, and so, will be considered a Large Company for the purposes of Tax Credits. This applies to the whole year, and they must therefore claim under the RDEC scheme, despite having been an SME for the majority of the year.
The second instance is to grow organically to exceed the SME thresholds. The rules for claiming R&D Tax Credits in this case are very different.Not only can you claim under the SME scheme for the entirety of the accounting period where exceeding the SME thresholds occurred, you can also claim under the SME scheme for the following accounting period!
As an example:
If company A has 480 employees in year one but goes up to 510 employees in year 2 it will remain a SME for year 2. If however it still has at least 500 employees in year 3 it will be a large company for year 3.
Large company to SME
This ‘transition period’ also applies when a large company becomes a SME. This change in status could be as a result of leaving a larger group of companies you were a part of, or an organic contraction of the company’s size and operations.
As an example:
Let’s assume in year one company B is large, as it is part of a group of companies which, when considered together, exceed the staff headcount threshold. In year two company B leaves the group and as such, meets all the criteria to be considered an SME. However, it will still be considered a large company for that year. Company B will be considered an SME for the purpose of R&D Tax Credits in year three if it meets the SME threshold tests for a second year in succession.
Hopefully this sheds some light on the effect of a transition between SME and large company status on claiming R&D tax credits. Making sure you are correctly claiming for the right amount under the correct scheme is essential in speeding your claim through HMRC. If you are unsure about how to classify your company, here is a link to HMRC’s advice on transitions or get in touch and we would be happy to advise you about the best way to move forward.
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