R&D tax credits: The ultimate guide for SME businesses

SMEs (or small and medium-sized enterprises) make up the majority of businesses operating in the UK. According to the UK Parliament Business Statistics published on 22nd January 2021, there were six million SMEs in the UK by the end of 2020. To put this into perspective, this accounted for over 99% of all UK businesses.

HMRC has recently released its annual R&D tax credits statistics and of the 85,900 total R&D tax credit claims made for the year ending March 2020, 76,225 of these were SME claims. This marks a 16% increase on the previous year.

What are SMEs?

For the purposes of R&D tax credits, HMRC defines a business as being an SME if it has: 

  • Less than 500 employees and,
  • a turnover of less than €100m or
  • a balance sheet worth no more than €86m.

The SME scheme

For small and medium-sized businesses, there are two schemes that provide benefits through R&D tax credits, the SME scheme and the RDEC scheme. As the name suggests, the SME scheme was designed for small and medium-sized businesses. The RDEC is for large companies but may be applicable to SMEs in certain circumstances, such as receiving grant funding or undertaking subcontracted work. Both schemes work by allowing companies to benefit from their spend on R&D projects. The amount of benefit your client can receive is based directly on the costs incurred during their R&D work. The SME scheme offers relief of up to 33% of your client’s total qualifying R&D costs. This results in either a cash payment or as a reduction to your client’s Corporation Tax liability, which translates to a significant monetary amount for small and medium-sized businesses. According to HMRC’s latest statistics, in the year ending March 2020, £4.4bn worth of tax relief was claimed through the SME scheme. 

The SME scheme also allows unprofitable businesses to benefit. When a company ends their financial year in a loss making position, they can ‘surrender’ some or all of the losses for cash. This payment is calculated at 14.5% of the surrenderable loss value. This cash could serve as the lifeline your client needs to get back on track.

Qualifying R&D costs

Although all of the costs involved in your client’s R&D project likely contribute towards the end goal, not all of them will qualify for R&D tax credits. You and your client need to know what can and can’t be included as it will help maximise their claim. This is doubly important as any expenditure wrongly included in a claim could result in an HMRC enquiry. 

Related: What expenses qualify for R&D tax credit?

HMRC outlines qualifying costs under the SME scheme, which are as follows:

  • Employee costs 

Payroll costs can be included for employees that directly contributed to the R&D.. As well as employees who are directly involved in R&D you can also include employees in supportive roles.

  • Subcontractor costs

R&D work subcontracted to another company may also be claimable, which can be claimed at a rate of 65% if the companies are not connected.

  • Software and Consumables 

Software used in R&D processes may qualify. This can include development and testing tools.  

Consumables are anything that is consumed or used up during R&D processes. This includes materials, chemicals, components, fuel, light, heat or other substances. 

R&D costs not to include

  • Rental costs.
  • Trademarking or patenting costs.
  • Costs of producing and distributing goods and services.
  • Land.
  • Capital.

Related: Most common overlooked expenses when making an R&D claim

The RDEC scheme

Last year more than half of the RDEC claims were made by SMEs. Here are some of the reasons why an SME client may have to apply for RDEC:

  • Your client is a connected or partner company: Combining the size of multiple businesses can exceed HMRC’s SME definition.
  • Your SME client has done Subcontracted R&D: Subcontracted SMEs cannot claim through the SME scheme. This is to prevent individual R&D projects from being claimed by multiple companies for the same costs. They may be able to claim through the RDEC scheme.
  • Your client is a recipient of Notified State Aid: This is particularly important to bear in mind in the aftermath of the Covid-19 pandemic, as many businesses have received government support. Depending on the nature of the aid, part of your client’s R&D tax credit claim may have to be done through the RDEC scheme.

Related: How Covid-19 funding will impact R&D tax credits.

The RDEC scheme allows businesses to claim up to 13% back from their qualifying R&D expenditure. It should be noted that this is a gross percentage because this benefit is subject to Corporation Tax.

Related: The basics of RDEC

Why small and medium-sized businesses are well positioned to benefit from R&D tax credits

Since small and medium-sized businesses are predominantly focused on scaling up and expanding their operations, SMEs often conduct qualifying R&D work without realising that it qualifies for the scheme. This includes improving upon existing products or processes.R&D tax credits can be claimed for work done during your client’s two previous accounting periods. 

Related: R&D tax credits: a boon for small businesses.

How to prepare a claim

R&D tax credit claims might seem time and labor intensive. With the proper tools, however, they can be completed quickly and efficiently. Here are the simple steps to follow:

  • Select the projects you are going to include in your client’s claim: Qualifying R&D projects are defined by HMRC, with this definition applying to both the SME and RDEC schemes. Read: 4 ways to find out whether your project qualifies for R&D tax credits.
  • Understand which scheme your client’s costs will be put through: As discussed earlier, there are many factors to consider when understanding if a cost should be put under the SME or the RDEC scheme. 
  • Add up your client’s total qualifying R&D costs. 
  • Write up a technical report: This is your client’s opportunity to show HMRC how they overcame uncertainty in their R&D projects.
  • Complete and file the CT600L: Inputting your client’s R&D costs into the form accurately.

Ensure the best for your client with made.simplr

We trust this guide has been helpful for you and your client. If you want to ensure a more streamlined process for putting together  their R&D tax credit claim, made.simplr is the software that can help. Our R&D tax credit platform allows the preparation of your client’s claim to be fast tracked, with integration to Xero accounting software.

We make  R&D tax credits simplr!

Find out  how by booking a demo with us today!

content team

Our Content Team is the R&D specialised, curious and thorough group behind made.simplr's blog and R&D resources, covering topics of interest to the R&D, accounting and innovation world.

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