When filing an R&D Tax Credit claim, you may think it is just formed from the technical and the financial data, but there are many layers to consider in your R&D claim cake. One of these extra layers is reviewing the position of your company in a wider context – ie its autonomy, as it can drastically impact on your claim. If a company is not considered autonomous, then special rules apply to determining whether it is an SME.
What is the importance of autonomy for an SME?
The R&D Tax Credits scheme is notably more lucrative if you are claiming as an SME; however, sometimes smaller companies are part of a bigger group and not completely autonomous. It is essential this is explored and reflected in your application, otherwise your company could be at risk of an HMRC enquiry – as mentioned in earlier blog posts, this is something you want to avoid!
HMRC defines a business as clearly autonomous if no external, corporate entity owns 25% or more of its shares, and if it doesn’t own 25% or more in any other company. If that’s the case for you – great news, you can skip the rest of this post. If not, read on:
Examples of autonomy in the wild:
Let’s consider Company A and Company B, without specifying which one is which. There are two ways the companies might be connected: linked, and partner.
Company A and Company B are considered linked if:
- A owns more than 50% of the voting rights of B; or
- A can appoint or remove a majority of the management team of B; or
- A can exert a dominant influence over B; or
- A can indirectly achieve the above via agreements with the other shareholders.
Company A and Company B are considered partner enterprises if:
- A owns between 25% and 50% of B
But if A is an investor-type company then they are not partners at 25-50%, only above 50% (at which point they are linked, not partner)
- A is an “investor” type of entity. This includes:
- public investment corporations, and VC firms;
- angel investors, provided the company has not raised more than €1.25m from those investors;
- universities and non-profit research centres;
- institutional investors, including regional development funds;
- autonomous local authorities with an annual budget of less than €10m and fewer than 5,000 inhabitants.
Well, that’s quite a piece to digest.
Determining your SME status:
Assuming your company is connected to another, here is the impact in terms of determining your SME status:
- If two companies are linked, then they are considered to be part of the same group for the purpose of determining the SME status; so all of Company B’s staff, turnover and balance count in the calculation of the status of Company A;
- If two companies are partner enterprises, then a percentage of Company B counts towards Company A’s staff, turnover and balance sheet. So for example, if A (200 staff) owns 30% of B (100 staff), then A will be considered to have 230 staff for the purpose of determining SME status.
The R&D Tax Credit scheme is much more lucrative if you are an SME, but it is still worth doing, even if your company is not autonomous and gets pushed into the RDEC (Large Company) scheme – more on this later. If your company is not an SME, you should almost certainly get professional advice for your Tax Credits, as the rules for large companies are substantially different.
Still confused? Please don’t hesitate to get in touch! We are always happy to help you explore your funding options, regardless of the size of your company.