The research and development tax relief scheme was introduced in April 2000 in order to encourage UK businesses of all sizes to engage in innovative projects of a scientific or technological nature. Many small and medium sized enterprises are eligible to claim R&D tax credits under the SME scheme, but research suggests that as few as 10% of them are aware of their ability to do so. The remuneration, however, can make a substantial difference to the finances of a small business and, in some cases, influence whether that business can continue trading. With that in mind, we’ve created a short guide to R&D tax credits for SMEs.
What is the SME scheme?
For the purposes of an R&D tax claim, the government defines an SME as one which:
- Pays UK corporation tax
- AND has fewer than 500 employees
- AND an annual turnover of less than €100 million
- OR a balance sheet of less than €86 million
Rate of tax relief under the SME scheme
SMEs receive a slightly more generous rate of tax relief than larger corporations. As of April 2015, the relief on qualifying expenditure is 230% – in other words, for every £100 spent on costs directly associated with the R&D project, an SME can reduce its corporation tax bill by that £100 plus an additional £130.
R&D tax credits are not solely the prerogative of profitable businesses. Smallenterprises that are operating on a loss can also claim for tax relief on eligible projects. Organisations with an allowable trading loss can either receive tax credits in cash from HMRC or carry the loss forward.
HMRC has outlined what costs qualify for R&D tax relief. These are revenue basedand may include:
- Cost of the direct employment of staff working on the R&D project
- A percentage of the costs of hiring subcontractors
- Any materials required during the project
- Any utilities that are used specifically for the purpose of the project, such as power or water
- Certain types of software purchased specifically for the R&D
The stipulations around tax relief for the hiring of subcontractors are fairly intricate, so it is advisable to seek assistance from an R&D tax specialist, who can provide information on the particulars and ensure your calculations are correct.
Making an R&D tax claim
Claims can be made on your Company Tax Return (CT600) up to two years after the end of the relevant accounting period. Details of the expenditure incurred and a calculation for the amount you are claiming should be inputted into the relevant fields on the form.
To increase the chance of your claim proving successful, HMRC suggests that a summary of costs is provided, alongside documentation that states why the relevant project(s) qualify for R&D relief. Although it’s not a legal requirement, failure to provide the necessary evidence to support a claim can result in tax credits being declined.