R&D Tax Credits: SME and RDEC schemes explained
If you’re viewing this page, you’ll possibly be new to the R&D tax credit scene. If you do or have been carrying out R&D activities to innovate or advance your business, you might be eligible to reclaim up to 33% of qualifying expenditure. This claim is paid either as a cash rebate into your bank or as a credit on your corporation tax bill, depending upon your state of profit or loss.
‘R&D’ is a fairly broad term, and it can be difficult to know what constitutes R&D. View our article about HMRC’s definition of R&D and if it applies to your business.
What are the two available schemes?
If you meet the eligibility criteria, you’ll be able to claim R&D tax relief under one of two schemes:
- SME (small-medium enterprise) scheme
- RDEC (research and development enhanced credit) scheme
Which one is right for you and which does your business come under? Read on, dear friend.
Why are there two schemes?
Until April 2023 at least, the SME scheme was deliberately set up to offer greater rates of relief for SMEs across the country to incentivise and reward growth and innovation. Hardly surprising given that 99.2% of UK businesses were classified as an SME as of Q1 2022. Many small enterprises have innovative technology, ideas, products or solutions that are costly to develop or research, so the Government’s plan in 2000 was to reward companies’ risk by offering high rates of return on eligible R&D expenditure.
The RDEC scheme for larger businesses acknowledges that larger businesses also take risks researching and developing their offerings, however as they are generally more stable than SMEs, the rates of return were generally lower. The RDEC scheme also remains available to SMEs who are ineligible to claim under the SME scheme because they are owned by larger parent or investing organisations, which you can read more about on our news pages here.
SME scheme
Complicated calculations are needed to accurately determine how much a business can claim back under the SME scheme. However, as is how we operate at Yuzu Group, we’ll keep things simple (we delve into the detail of how to accurately calculate your R&D claim in another article).
SMEs eligible for the SME scheme can reclaim up to 25% of their qualifying R&D expenditure if they are profitable. For loss-making SMEs, this figure increases to 33%.
If your company is profitable, you will have a corporation tax liability and thus your finalised claim amount will be granted a tax relief, effectively deducted from your tax bill. If your company is loss-making and does not owe any corporation tax, successful claims can be paid as a tax credit as a cash transfer into your bank.
Didn’t the rates change in April 2023?
These figures apply to qualifying R&D costs incurred up to 31st March 2023. From 1st April 2023, SME rates have reduced quite significantly, primarily due to high volumes of fraudulent submissions being received by HMRC. Profit-and-loss-making businesses can now reclaim 16% and 18%, respectively, against their qualifying R&D expenditure, demonstrating quite a drop in the rate of return on offer.
RDEC scheme
Large organisations qualifying for the RDEC scheme enjoy a simpler scheme whereby a singular rate is applied regardless of the company’s profit state. For expenditure incurred pre-April 2023, the rate is 13%; after April 2023, the rate is 20%. As indicated above, the RDEC scheme is open to SMEs, too, so it cannot be strictly classed as a scheme only available to ‘large’ companies.
What is the eligibility criteria for the two schemes?
Companies must satisfy the following conditions to claim under the SME scheme:
- Have less than 500 staff
- Have a turnover under €100 million
- Have a balance sheet under €86 million
If you cannot satisfy all three of these, your business must claim under the RDEC scheme. Again, there are certain circumstances in which an SME can claim under RDEC, which our team can help you understand).
The two schemes are taxed differently.
When discussing the two schemes, it is important to know that they are subject to different tax rates. Relief generated through the SME scheme is not subject to corporation tax. Your corporation tax liability is calculated first, with your relief claim deducted from it.
RDEC, however, is subject to taxation. Instead, relief claims are calculated and included as part of your company’s income, with the appropriate rate of corporation tax then calculated afterwards.
Contact our consulting team to help understand which scheme you could claim under and which projects and costs are eligible.
