R&D tax relief (SMEs)
If a company is a small to medium-sized enterprise (SME), tax relief may be claimed on a proportion of the expenditure on R&D activities.
SME classification
A company is an SME if it has:
- Total staff of fewer than 500 people and
- A turnover of less than €100 million or balance sheet assets of less than €86 million
Connected companies may need to have their figures included for assessing SME thresholds. This is dependent on the connected company’s classification as either:
- Autonomous: no external, corporate entity owns 25% or more of its shares and if it does not own 25% or more in any other company
- Linked: are able to exercise control over the affairs of the other via usually through holding greater than 50% of company voting rights
- Partner enterprises: are not linked, but enterprise holds between 25% and 50% of voting rights
What costs qualify for R&D relief?
- Staffing costs (including gross salaries, wages, overtime pay and cash bonuses), employer National Insurance contributions and employer pension contributions
- Payments to a subcontractor to carry out activities that are part of the company’s R&D. The subcontractor’s activities need not be R&D when considered in isolation, as long as the activities are part of a larger project that is R&D. Subcontracted analytical testing, for example, may qualify for relief. Only 65% of the total subcontractor costs can qualify for R&D relief, and relief may be available where the subcontractor is outside the UK
- Costs of externally provided workers (EPWs), which are the staff costs paid to an external agency for staff who are directly and actively engaged in the R&D project. EPWs must carry out R&D activities under the supervision, direction, or control of the claiming company. Only 65% of the total EPW costs can qualify for R&D relief
- Consumables, which are materials that are consumed or transformed in the R&D process. These include utilities such as water, fuel, and power
- Software, including the cost of software licences utilised in the R&D activities
How are benefits calculated?
SME R&D relief allows companies to:
- Deduct an extra 130% of their qualifying costs from their yearly profit
- Claim a tax credit if the company makes a loss, which is worth up to 14.5% of the loss that can be surrendered
For companies making a profit
SME R&D relief allows companies to deduct an extra 130% of qualifying costs from their profit for tax purposes.
The net benefit is therefore £24,700, or 24.7% of the qualifying R&D expenditure.
For companies making a loss
SME R&D relief allows companies to:
- Deduct an extra 130% of their qualifying costs from their profit
- Claim a tax credit worth up to 14.5% of the loss that can be surrendered
The amount of the loss that can be surrendered is the lesser these two amounts.
| Trade profits | = |
-£1,000,000 (a loss)
|
| Corporate tax liability @19% | = | £0 |
| Qualifying R&D expenditure | = | £100,000 |
| Enhanced deduction @130% | = | £100,000 x 130% |
|
|
= | £130,000 |
| The enhanced R&D deduction is subtracted from trading profits. Revised trading profits SME R&D relief allows companies to surrender losses in exchange for a cash credit. | ||
The cash credit is 14.5% of the loss that can be surrendered, which is the lesser of:
|
= = |
(£1,130,000) (230% x £100,000 = £230,000) |
| R&D tax credit | = | Cash credit rate x 230% x qualifying R&D expenditure |
| = | 14.5% x £230,000 | |
| = | £33,350 | |
The net benefit for the company is therefore £33,350.
This equates to 33.35% of the qualifying R&D expenditure and is more generous than R&D relief for profitable companies.