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Empowering small businesses with SME R&D Tax Credit
Are you a small or medium-sized enterprise (SME) looking to innovate and drive your business forward? SME R&D Tax Credits allow your small business to retrieve up to £27 back for every £100 you’ve spent over the last two financial years on qualifying research and development activities. It’s time to unlock this financial reward for your research and development endeavours with HMRC's SME R&D Tax Credit.
Your ideas, our commitment: We are dedicated to empowering your ideas and optimising your R&D claims to their fullest potential.
Catching a glimpse of the R&D SME scheme
The UK's Government supports small and medium-sized companies within the UK with R&D tax credits to foster innovation and stimulate economic progress. These credits empower these companies, irrespective of profitability, by offsetting the costs incurred by R&D activities that drive efficiency and sustainability across different sectors.
Qualifying criteria for SMEs
Size of the company
You have a headcount
of less than 500 staff
Analysing profitability
Your company’s turnover is
under €100 million
Balance sheet or gross assets
Or your company has a balance sheet
total of under €86 million
You need to be a limited liability company engaged in R&D activities, incurring expenses associated with these endeavours within the UK, and also fulfilling obligations of corporation tax.
The factors preventing small businesses from accessing the R&D SME scheme
In certain cases, your company may meet the SME's category criteria but not qualify for the R&D SME scheme. In such instances, you should consider the Research and Development Expenditure Credit (RDEC) scheme, originally designed for larger companies.
Factors
Subcontracted SMEs
When SMEs are hired by larger companies to carry out R&D on their behalf
Owned by larger companies
- Partner enterprises : When the shares of SMEs are owned by larger companies, ranging from 25% to 50%
- Linked enterprises : When the shares of SMEs are owned by larger companies, with ownership of 50% and more
Grant recipient
It is in some cases where SMEs are receiving Notified State Aid
How does the R&D SME scheme work?
The R&D SME scheme offers pivotal funding to help small and medium-sized companies with their R&D projects. You could get R&D tax credits in various forms, such as reducing your corporation tax, getting cash back, or a combination of both, provided you meet the qualifying criteria. To qualify for the SME scheme, you must be engaged in:
- The development of new or improved products, processes, services or even the advancement of existing ones in your industry
- Overcoming technical challenges or uncertainties to achieve scientific advancements
- Systematic investigation or experimentation throughout the process, trying something that isn’t guaranteed to work
Analysing for R&D SME scheme
Permitted purpose
You are aiming to enhance the performance, reliability, quality and functionality of a product or software
Technological uncertainty
You are unaware of the project's outcome, and there is a possibility that unforeseen results might occur during the development of a product or software
The process of experimentation
You are engaged in the process of undertaking a trial-and-error phase with the intention of overcoming technological uncertainties
Technological in nature
Your work falls within the domains of engineering, physical sciences, biological sciences, or computer science
What are R&D qualifying costs?
Staff PAYE costs/Pension contributions
Your company is eligible to request reimbursement for salaries, wages, class 1 NIC (National Insurance Contributions), and pension fund contributions paid to employees who are directly and actively involved in the R&D projects.
Subcontracted costs
These costs pertain to payments made to an external agency for individuals directly and actively involved in the R&D project. These individuals are not employees or subcontractors but are engaged through the agency. Typically, relief is provided for 65% of the payments to the staff provider.
Materials and consumables
Your company is eligible to seek reimbursement for the expenses incurred on items that are directly used and consumed in qualifying R&D projects. These expenses cover materials, water, fuel, and power utilised in the R&D process.
Software purchases
The expenses related to operating systems, software platforms, and permissions granted for accessing and utilising digital data that is directly used in your R&D activities can be reimbursed. You may need to allocate the costs of partially used software appropriately to determine the eligible amount for the claim.
Travel costs
Certain travel expenses associated with your research and development may also be eligible for your claim. These costs include collaboration, attending relevant events, visiting research sites, or conducting fieldwork directly tied to your R&D projects.
Utilities
Utilities such as water, gas, and oil can also be claimed as part of eligible costs. However, it is important to note that only the portion of utilities used exclusively for R&D purposes will be eligible, not the entire utility bills.
What are the rates for the SME scheme?
The financial status of your SME will determine the rates of R&D tax credits, whether it's making a profit or facing a loss. SMEs trading at a profit or loss can calculate their entitlement based on the R&D enhancement. The R&D enhancement is calculated at 86% of the qualifying expenditures, which is then added back onto the qualifying expenditures to give you the enhanced expenditure (186%).
For accounting periods beginning on or after 1 April 2023, qualifying R&D expenditure is enhanced by 86% when calculating the relief available.
How to calculate R&D tax credits for SMEs?
Loss-making SMEs
If you’re trading at a loss and want to claim for an accounting period between 1 April 2023 and 1 April 2024, you could benefit from an 86% additional deduction and a payable credit of 10%, giving your business a maximum cash benefit of 18.6%. For example: If your company has spent £500,000 on qualifying R&D expenditure, you could receive up to £93,000 as a cash benefit. Note: From 1 April 2024, all new claims will fall under the merged R&D scheme.
Example of a loss-making SME
| Description | Amount |
|---|---|
| Qualifying R&D expenditure | £500,000 |
| R&D enhancement at 86% | £430,000 |
| R&D enhanced expenditure totalling 186% | £930,000 |
| Loss for the financial year | -£500,000 |
| Loss after R&D relief | -£930,000 |
| Surrenderable loss | £930,000 |
| Entitlement payable at 10% | £93,000 |
Profit-making SMEs
If you’re trading at a profit and want to claim for an accounting period between 1 April 2023 and 1 April 2024, you could claim up to 21.5% of your qualifying R&D expenditure as a corporation tax reduction or refund. This credit will be applied to your revised profit figure for the year at the current corporation tax rate. For example: If your company has a total qualifying R&D expenditure of £500,000, you could receive up to £107,500 in the form of a corporation tax reduction or rebate. Note: From 1 April 2024, all new claims will fall under the merged R&D scheme.
Example of a profit-making SME
| Description | Amount |
|---|---|
| Qualifying R&D expenditure | £500,000 |
| R&D enhancement at 86% | £430,000 |
| R&D enhanced expenditure totalling 186% | £930,000 |
| Profit for the financial year | £750,000 |
| Profit after R&D relief | £320,000 |
| Corporation tax rate | 25% |
| Corporation tax saving (effective benefit up to 21.5%) | £107,500 |
Claiming R&D tax credits for SMEs
The first and foremost step is to check your eligibility for R&D tax credits. It's worth analysing your qualifying activities and expenditures to be able to start your R&D claim from the beginning, rather than facing HMRC queries at later stages. You will also need to determine which R&D scheme to opt for, as it has a significant impact on the calculation of R&D expenditures and, ultimately, the outcome.
Identify the R&D projects conducted during the accounting period that meet the criteria for R&D tax relief. These projects must involve work to advance knowledge or capabilities in science or technology.
Identify and calculate the eligible R&D expenditure incurred during the accounting period. This includes costs related to staff costs including National Insurance Contributions (NIC) and pension contributions, subcontractors, materials & consumables, software including cloud computing and data costs, and certain indirect expenses.
Calculate the aggregate of eligible costs and qualifying expenditures accumulated by the projects included in your claim. SMEs can claim R&D tax credits of up to 186% of the qualifying R&D expenditure. The calculation will provide you with an estimate of your entitlement.
Include the R&D tax credit claim as part of your company's corporate tax return. You will need to provide detailed information about the qualifying R&D projects and their associated costs.
Prepare and submit supporting documentation, including technical reports, project summaries, and evidence of eligible R&D activities, to substantiate your R&D claim.
HM Revenue & Customs (HMRC) will review your R&D claim, and they may request additional information or clarification if necessary. It is highly recommended to ensure you provide accurate information and that all required documents are complete and demonstrate the authenticity of your claim, in order to reduce the chances of HMRC inquiries.
Upon successful approval of an R&D claim, you have the potential to receive the benefits of R&D tax credits in various forms, including corporation tax reduction, a cash refund, or a combination of both.
R&D tax credit claim template for SMEs
Our team of R&D tax credit specialists has meticulously developed the R&D tax credit claim template for SMEs. It provides a step-by-step guide to recording your qualifying costs and other necessary details mandatory to make a robust claim to HMRC. By using this template, you can increase the chances of achieving a favourable outcome for your application.
Maximising R&D tax credits for your SME
Your R&D claim is safe with us
Our team of R&D tax credit specialists possesses exceptional skills to assess your situation and is highly skilled in creating robust R&D claim applications. With a thorough understanding of the latest regulations and HMRC rules, they can adeptly navigate challenges, ensuring you have a smooth process and maximising your benefits through the R&D SME Scheme.
£Millions
Claimed back for our clients.
5 
Reviews from our happy clients
2400+
R&D claims submitted across all sectors
£63,000
Average claim
“Dealing with Alexander Clifford for my R&D tax credits was a breeze and pleasure from start to finish. Their team is amenable, extremely knowledgeable and professional, and their claim process was very fast and efficient. I would highly recommend them to any company looking to take advantage of the scheme and we’re very much looking forward to working with them again in 2023. 5 stars all round.”
Gary Jackson
Frequently Asked Questions
We work on a contingent basis. This means that we don’t charge you if you don’t receive any R&D tax credits. If your R&D claim is successful, we take 25% of your final claim value.
The R&D tax credit claim has a time limit of two years from the conclusion of your accounting period. Within this period, you must submit your R&D tax credit claim for all eligible expenditures identified during that specific timeframe. This is because R&D tax credits fall under Corporation Tax relief, and the usual deadline for amending your Corporation Tax return is 24 months after the conclusion of your accounting period.
Yes, even if your company is operating at a loss, you can claim R&D tax credits. The new rates are 86% for the R&D enhancement, 186% is the enhanced expenditure, and will be calculated at 10% of the surrenderable loss.
If the transition is organic, the status remains unchanged until the second year when it is achieved. For instance, if an SME grows organically and becomes a large company in year 1, and this status continues into year 2, the company can make an SME claim in year 1, but in year 2, it would need to claim under RDEC, as they no longer meet the SME eligibility criteria. However, if the change in status is a result of a takeover or sale of a group company, the change is immediate. An SME being taken over by a large company should consider shortening its accounting period to end just before the takeover. This allows them to benefit from making an SME R&D claim for the period before the takeover. What matters is the company's status in terms of the SME test thresholds at the end of an accounting period.
This concept is exclusive to SME claims. The previous large company scheme has been completely replaced by RDEC, which does not include enhanced expenditure. Enhanced expenditure refers to the qualifying expenditure multiplied by 186%. This value is always entered into Box 660 in the CT600 when making an SME R&D claim.
Yes, for SME claims only, these considerations are significant. If an SME receives State Aid for an R&D project, then every £1 of State Aid received means that none of the project costs can be included in an SME R&D claim. However, the project may still be claimed under RDEC if it meets the RDEC rules (except for mainly work subcontracted to other companies, which cannot be claimed under RDEC). If a grant does not qualify as State Aid, for instance, if it is not awarded or administered by the state, such as an EU Horizon 2020 grant, or if it falls under De Minimis and the company has not exceeded the threshold where De Minimis grants are treated as state aid, then an SME can claim the grant-funded portion of the project under RDEC and the remaining portion under the SME scheme.
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Our hassle-free and streamlined process is waiting for you to get started and to make you feel confident throughout your R&D claim application.
