A brief guide to HMRC's SME R&D Tax Credit scheme

R&D Tax Credits go a long way in funding company innovation. In this article we’ve looked at the SME branch of the scheme specifically. However, it’s also well worth exploring the Research and Development Enhanced Credit scheme, as well as other tax reliefs like creative tax reliefs.

We hope this quick guide to the SME branch of R&D Tax Credits is useful, but of course if you have any questions please do get in touch with our expert team. Don’t forget you can also find out more about our service on our R&D Tax Credits page.

First off, what are R&D Tax Credits?

The UK government has long recognised the important role technological and scientific innovation brings, not just to individual companies but the wider economy too. This is why, back in the early 2000s, it launched the very generous R&D Tax Credits scheme.

How does R&D tax relief work?

R&D Tax Credits mean that UK companies can receive an enhanced deduction when calculating their taxable profits for eligible expenditure. The effect of this is either to reduce their Corporation Tax liability or – if the company is loss-making – the company can choose to surrender those losses to HMRC in exchange for a cash payment.

The relief is available to companies who intend to advance or make an appreciable improvement in science or technology when developing products, processes, software or services.

Which types of SMEs are eligible?

The research carried out must bring about some kind of technical or scientific advancement that is original and that benefits the field in which the company operates, not just the company itself. The outcome of the project must also not have been obvious from the start and not be easily solvable by a professional working in the field. It doesn’t even matter if the project ultimately failed in its objectives; a claim for R&D Tax Credits can still be made as long as the eligible types of research were undertaken.

If you’re not sure if your project will qualify for R&D Tax Credits or not, do get in contact with us at Myriad Associates. Our team consists of a broad range of R&D tax relief and grants specialists, all with unique skills in helping you to access the money you’re owed - efficiently and hassle-free.

How much can I claim?

This is where things get a little more complicated because R&D tax relief is administered under one of two branches: the SME scheme and RDEC. Most smaller sized and medium sized businesses will claim using the SME scheme, which is highly lucrative. In fact it’s possible to claim back as much as 33 pence for every £1 for R&D expenditure incurred. Larger companies, as well as smaller companies that have previously received certain types of state aid, will need to use RDEC.

As mentioned, we’re not going to cover RDEC in detail here, so we recommend reading our two recent blogs Everything You Ever Needed To Know About RDEC and SME vs RDEC: R&D Tax Credit Schemes Explained.

What makes a company an SME for the purposes of claiming R&D Tax Credits?

Typically companies will use the SME branch of the R&D Tax Credits scheme if they:

• Have under 500 employees; and

Either:

• A turnover of €100 million or less per annum, or
• Gross assets of less than €86 million per annum

What if my SME is part of a group?

If the company has links to other enterprises or is part of a group, then these thresholds will need to be aggregated when making your R&D Tax Credits claim.

What expenditure will qualify?

Generally speaking, qualifying expenditure must be deductible as a revenue expense of the trade for corporation tax purposes. This means it must not be capital in nature, however R&D capital allowances may be available for capital expenditure. Again this is something we can help you with.

Eligible costs under the SME scheme are very specific and include:

• Staffing costs such as wages, expenses and overtime
• Payments made to externally provided workers, subcontractors and freelancers
• Employer’s NICs and pension payments
• Certain types of software or consumable items
• Payments made to volunteers for any clinical trials

It’s worth pointing out here that this list isn’t necessarily exhaustive and HMRC guidance is regularly updated. When you work with R&D tax specialists like Myriad Associates, we will take the time to get to know your business and your R&D project in detail so that all your costs are captured. This means you can be safe in the knowledge that over-claiming or under-claiming simply won’t happen, and you’ll receive all the relief you’re owed.

What’s the time limit to claim?

R&D Tax Credits must be claimed a maximum of two years from the end of the accounting period during which the innovative project took place. From the 1^st April 2023, if you are a first time claimant you will need to inform HMRC in advance that they wish to claim. This must be done within 6 months of the accounting period end. Don’t leave it too late!

Speak to the R&D experts

If you’ve got any questions about the SME branch of the R&D Tax Credits scheme, or about R&D tax relief or R&D grants in general, then please do get in touch with our team. You can either call us on 0207 118 6045 or send us a message and we'll get back to you.