The SME R&D Scheme
A small or medium sized enterprise (SME) is defined as a company with:
- Less than 500 employees (in terms of full time person years); and
- An annual turnover ≤ €100m OR annual balance sheet total (i.e. gross assets) ≤ € 86m
There are further complex rules which govern how to assess companies who are part of a group or have complicated control or ownership structures in place. As part of our service, we can investigate how these rules apply to your claim and make a full assessment as to whether your company will qualify as an SME.
What are claims worth under the SME scheme?
For the SME market, the benefit of claiming for qualifying R&D activities is unprecedented. The UK Government has continued to increase the benefit of claiming since the schemes began in 2000.
The process of calculating the benefit can be broken down as follows:
The 130% R&D Uplift:
The initial part of process for any claim is to apply a 130% uplift (valid from 1 April 2015, 125% for expenditure before this point) to your R&D expenditure.
What does this mean? If you spend £100,000 on qualifying R&D activities and these costs fall into the valid qualifying categories, the spend then becomes £230,000 for the purposes of your tax computation.
The next stage of the process then depends on your tax situation and can include a combination of any of the following three options:
Broadly speaking, there are three main mechanisms:
R&D Tax Relief
Often confused with R&D Tax Credits, R&D Tax Relief works as a refund or saving of Corporation Tax. This mechanism is only relevant to companies that are profitable from a tax computation viewpoint and therefore liable to Corporation Tax, otherwise you will need to consider R&D Tax Credits.
What is it worth? Using a Corporation Tax rate @ 19% (effective from 30th April 2017), a claim could be worth to the value of 24.7% of your qualifying expenditure.
How is it calculated? The net cash benefit is dependent on the Corporation Tax rate, which is directly linked to company profits. Using the example above of a £100,000 qualifying spend; the 130% R&D uplift is applied and the enhanced expenditure is then offset against the Corporation Tax liability. In this case, the R&D claim would generate an additional £130,000 to offset against your Corporation Tax liability. Using the 19% Corporation Tax rate, this would equate to a net cash benefit of £24,700 based on £100,000 expenditure.
The additional 130% uplift on your spend creates enhanced tax losses. It may be the case that you have already received R&D tax relief that has refunded your all of your Corporation Tax liability, or it may be the case that you were not in a tax paying situation, due to historic losses. For various reasons, it may be beneficial to simply enhance your losses and offset them against a future Corporation Tax liabilities, or allocate these losses elsewhere in a company group structure.
R&D Tax Credits
An R&D Tax Credit has the potential to net up to 33.35% of your qualifying development costs back in terms of a cash payment from HMRC.
The rules relating to R&D Tax Credits have recently been improved in the 2014 Budget, increasing the R&D Tax Credit rate from 11% to 14.5%.
How is it calculated? For a simple example we can use the example from above with £100,000 of qualifying expenditure; after the 130% R&D uplift (explained above) is applied, the value of the R&D spend becomes £230,000. This can then be surrendered against the 14.5% tax credit rate to generate an R&D tax credit value (cash payment from HMRC) of £33,350.