R&D Tax Credits: What happens if I need to switch from the SME scheme to the RDEC scheme, or vice versa
The status of your business with regard to research and development (R&D) Tax Credits is likely to evolve over time. This can be for a number of internal and external reasons, including changes in gross assets and legislation or increases in turnover and staff. It’s these factors together which determine which part of the R&D Tax Credit scheme you should claim under - the SME scheme or the RDEC scheme.
Due to the fact that that the SME scheme is rather more generous than the RDEC one, many companies will aim to apply under the SME scheme if they possibly can.
What exactly is R&D Tax Credit?
Research and development (R&D) Tax Credit is a tax-based incentive offered by the UK government to encourage companies to grow and innovate. The scheme represents a highly popular and valuable source of finance for organisations to then invest in bolstering their R&D activities, from taking on new projects to hiring additional staff.
How do R&D Tax Credits work?
Any UK companies that have spent money on developing new products, services or processes recently may well be eligible for R&D tax relief. Even if a company hasn’t created anything new, but has instead improved something which already exists, it may well still have grounds for a claim. Payments are received either as a reduction in the company’s Corporation Tax or as a cash payment. The good news is that the breadth of R&D activities and who can make a claim is purposefully very broad. Plus, if a company is in receipt of R&D Tax Credits for the very first time, it can usually claim the relief for the two completed accounting periods immediately preceding its current one.
What are the key differences between the SME scheme and the RDEC scheme?
Which scheme a company should use to make an application for R&D Tax Credits largely depends on whether it is classed as an SME or a larger company.
For R&D Tax Credit purposes, SMEs should have less than 500 staff. They must also have under €100 million in turnover or no more than €86 million in gross assets. The majority of companies, including start-ups, will come under this category.
Companies with 500 staff or more should make a claim under the RDEC scheme which was specially designed for more established organisations. Additionally, they must also have €86 million plus in gross assets or over €100 million in turnover.
However, it’s worth noting that there are several factors like subcontracting and grants that can mean an SME will not automatically come under the SME programme. If, for example, a company has already had an R&D grant, then they may need to make a claim using the RDEC scheme instead - or sometimes both.
How much can R&D Tax Credits be worth?
R&D Tax Credits are paid out only on amounts that have been spent on R&D specifically. To calculate your R&D Tax Credit amount, you need to work out what qualifies as eligible expenditure and enhance it by the relevant rate. This will then produce your ‘enhanced expenditure’.
When you remove your enhanced expenditure from the company’s taxable profits (or add it to your loss if applicable) it will result in:
- A reduction in Corporation Tax if the company is currently making a profit
- A cash credit for loss-making companies, or,
- A combination of the two
To help you work out exactly what you could claim, why not try our Tax Cloud calculator for businesses. Designed by R&D tax relief experts it can save you a huge amount of time, money and hassle in putting together your calculations.
What happens if my business grows and crosses the threshold from SME to RDEC (or back again)?
Companies are constantly growing and changing and HMRC have made prevision for this. Some SMEs may well become so large over time that the SME R&D tax relief scheme is no longer applicable, or likewise an RDEC company may shrink. This could happen if, for example, it sells off some of its assets or reduces its number of employees.
The essential point to note here is that these changes have no effect on your company’s status until the conditions are met for two years consecutively. So during the accounting period in which the threshold was first crossed, a company can retain its existing status. There is however one exception to this rule, and that’s if an SME is taken on by a larger company or group, in which case the grace period does not apply. This is particularly important to remember if a merger or acquisition takes place.
What are the effects of a company changing its status?
Changing your R&D Tax Credit scheme from SME to RDEC – or back again – will affect the benefit amount you receive. This is because the credit rate is different between the two schemes. If your company goes from SME to RDEC, its R&D Tax Credit will reduce from a maximum of 33 pence for every £1 spent on R&D activities, to 10 pence for every £1 spent under RDEC. Other differences include the types of expenditure a company can include in its claim, as well as the way in which a claim is made.
Where can I turn to for help and advice if I have questions or concerns?
Tax Cloud UK is part of Myriad Associates, an expert team of experienced R&D tax consultants. We will be pleased to answer any questions you may have, allay any fears and work with you to facilitate your R&D Tax Credit application to give you the best chance of a success and maximising your claim.
Sign up to Tax Cloud to today to begin your R&D claim. With separate service offerings for both businesses and accountants, using Tax Cloud is a fast and accurate way of claiming R&D tax credits in 2019.
To discuss anything further, call us on 0207 118 6045 or use our contact page for excellent quality, professional advice.
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