In April 2000, the government introduced a tax relief scheme for businesses carrying out research and development of a scientific or technological nature. Many small and medium-sized enterprises are eligible to claim tax credits under the SME scheme, but research suggests that few are aware of their ability to do so. The returns, however, can make a significant difference to the finances of a small business, in some cases determining whether that business can continue trading or faces insolvency. With that in mind, we’ve created a short guide to R&D tax relief for SMEs.
The SME scheme
In terms of R&D tax credits, the government classifies an SME as one which:
- has fewer than 500 employees
- AND an annual turnover of less than €100 million
- OR a balance sheet of less than €86 million
The limits encompass linked, partnership or shareholding companies that have a 25% or more share in the company carrying out the research and development.
Rate of tax relief
The rate of tax relief available to SMEs is different to that which is offered to larger companies. As of April 2015, the relief on qualifying R&D costs is 230% – in other words, for every £100 spent on qualifying costs, an SME can reduce its corporation tax by that £100 plus an extra £130.
Even small companies that are operating on a loss can claim for tax reliefon eligible projects. In such cases, if your organisation has an allowable trading loss, it can be increased by 130% of the qualifying R&D costs and carried forward, providing you don’t transfer it into tax credits. If you opt for tax credits instead, your business will receive the value you are due in cash from HMRC.
Expenditure that qualifies for R&D tax relief is revenue based, and may include:
- Costs associated with the direct employment of staff working on the R&D project
- The physical materials that are required during the R&D
- Any utilities such as power or water used directly for the purposes of the project
- Computer software purchased specifically for the R&D
- Subcontractors assisting with the larger project
If you are using subcontractors, it is possible to claim back 65% of their costs relating to the R&D project. In these circumstances, however, it is wise to seek advice from a specialist R&D tax specialist, who can talk you through the particulars and help with the claims procedure.
Claiming R&D tax relief
Claims can be made on your corporation tax return up to two years after the end of the relevant accounting period. When submitting your return, you should calculate the amount spent and the amount you are claiming for in the relevant fields.
HMRC also suggests that companies provide a summary of costs incurred and state why the relevant project(s) qualify for R&D relief. This is not a legal requirement though. HMRC aims to have 95% of its R&D tax claims processed with 28 days of receipt, meaning you would typically receive payment a few weeks after filing your return.