THE R&D tax credit scheme was introduced in 2000 to encourage innovation, by providing a safety net to allow companies to do some risk taking. The scheme works by enhancing all money spent on R&D in a financial year. This enhanced expenditure is deducted from taxable profits, leading to an often substantial reduction in corporation tax. Loss making companies are even eligible for a cash credit.
Knowing whether your projects qualify for R&D tax relief under the SME scheme or the Large Company (RDEC) scheme is important, as it can significantly affect the size and value of your claim.
What’s the difference?
The rate of R&D tax relief is different for SMEs and Large Companies. The SME scheme is very generous whereas the Large Company Scheme is significantly less so.
SMEs can recover nearly 25% (if in profit) and 33.35% (if loss-making) of eligible expenditure, while for those claiming through the RDEC scheme can receive nearly 9% of eligible spend in benefit, after tax.
I know for a fact I am an SME, so why should I worry about this?
In certain specific situations, even if your company meets the definition of an SME, you may not be able to claim relief under the SME scheme. But, you may be able to claim under the Large Company (RDEC) Scheme. This means that, if your company is small or medium-sized, you may be able to claim R&D tax relief under the SME Scheme for one project and the Large Company Scheme for another.
How can I determine which scheme I need to claim under?
Jumpstart to the rescue! We’ve narrowed it down to 4 questions to help you define company status, plus an additional 2 questions to help define project status. The answer to which should point you to the R&D tax relief scheme that is right for your company.
Company Status
- Do you have more than 500 FTE staff?
- Do you have a turnover of more than €100m and a balance sheet worth more than €86m?
- Is your company majority-owned (i.e. over 50% ) by a large company?
- Has your company received investment from a large company at a level greater than 25%?
If you answer YES to any of these questions, then your business likely falls into a Large Company. If NOT then you will most likely be regarded as an SME.
Careful now…
Even if your company is undoubtedly an SME, remember that some of your work might push you into Large Company status.
Nature of the work (project status)
- Is the work you do carried out on behalf of Large Companies (i.e. subcontracted work)?
- Is one of your projects (or all development work) grant-funded? (As a rough rule of thumb – If an SME gets a grant or subsidy that is State Aid, that project’s claim may have to go through the Large Company scheme.
If you answer YES to any of these questions, then the project work may only be claimed under the Large Company scheme. It is however highly dependent on the nature of the funding and the individual grant applications. For example, if an SME gets a grant or subsidy that is not State Aid, its claim can be split between the SME and Large Company schemes.
Let Jumpstart help you make sense of it all
Whether you’re an SME or a Large Company, there’s significant financial support available for innovative companies under the government’s R&D tax credits programme. You just need to submit your claim in the most efficient way possible, to maximise results and value.
Jumpstart has helped Aberdeen businesses save substantially more than £6m since 2008, and more than £2m through the recent slump in oil and gas prices. The Edinburgh-headquartered company has been instrumental in assisting local firms claim tax credits on their investment in new processes and technologies, principally but not exclusively in the energy sector. Despite Aberdeen’s oil and gas exploration sector suffering from the worldwide drop in prices, 2015 saw £1.2m recovered from HMRC, and 2016 has seen £840,000 claimed to date.
For a free R&D tax credit consultation and analysis of the potential returns you might expect, contact our Jumpstart representative in Aberdeen and the North East: Ian Donaldson on 07527 635787, ian.donaldson@jumpstartuk.co.uk or visit the website: jumpstartuk.co.uk.