R&D Tax: What Size Is Your Company?

The UK’s R&D tax schemes are a very generous opportunity for innovative companies to recoup some of their costs for risky development. However, working out the specifics of thr schemes can be tricky.

Of course, companies must be registered in the UK and subject to Corporation Tax, but what after? There are four schemes that could be claimed currently, each with its own requirements.

The Small and Medium Enterprise scheme (SME scheme) and R&D Expenditure Credit scheme (RDEC scheme) are the existing, long-standing schemes. However, for accounting periods beginning 1^st April 2024, the Merged Scheme and its associated Enhanced R&D Intensive Support (ERIS) scheme will replace the previous schemes.

The size of your company impacts which of these schemes you can use to make a claim.

What is a SME?

A Small and Medium Enterprise, or SME, has a specific definition within the UK’s R&D tax schemes.

To qualify as an SME, a company must:

• Have a staff headcount of below 500
• Have EITHER:
  • A turnover of below €100 million
  • Gross assets of less than €86 million

All SMEs will have less than 500 staff, but they can have one of the other conditions. A company with a turnover of less than €100m and assets of less than €86m, but with more than 500 staff will still be considered a large company.

The staff headcount is the number of full-time person-years. Staff members include employees, persons seconded, owner-managers and partners (except sleeping partners). Part-time workers or seasonal and temporary workers will count as appropriate fractions of a full-time person-year. So, two people who both worked 6 months for the company will count as “one” for the headcount.

However, apprentices and people on maternity/parental leave can be excluded.

Claiming through the Merged Scheme

For accounting periods beginning on or after 1^st April 2024, all claims are made through the Merged Scheme. The Merged Scheme isn’t state aid and applies to small, medium and large companies alike, so there’s no additional work to be done to make sure you’re claiming correctly.

However, loss-making, R&D-intensive SMEs can claim through the Enhanced R&D Intensive Support (ERIS) scheme. There are multiple conditions to claiming through the ERIS scheme, one of which is that the company must be an SME, following the above guidelines.

Claiming through the SME scheme

Before the introduction of the new Merged Scheme, the SME scheme had a higher rate of relief and more generous expenditure categories than through the equivalent scheme for non-SMEs. This is why it’s important to be sure that you’re claiming the correct scheme, or you could be leaving money on the table.

Claiming through the RDEC scheme

The only time SMEs can’t claim through the SME scheme is if their R&D project is already subsidised.

When it comes to grant-funded projects, because the project has already received state aid, the SME scheme cannot be claimed too, as it’s also state aid. Therefore, grant-funded projects must use the RDEC scheme (which isn’t a state aid) to claim.

For projects that are subsidised by another company, it’s important to know company size too. In general, subcontractors (i.e., companies that have been paid to carry out R&D for another company) cannot claim for their subsidised projects. This is to prevent both the contracting party and the subcontractor claiming for the same work.

However, if a company completes R&D for a large company, it can claim for the work done, since there is no risk of the large company claiming for the subcontracted cost.

What is a Large Company?

A large company, for R&D tax purposes, is any company that exceeds the SME thresholds described above. A company with over 500 staff, and/or a company with both a turnover of more than €100m and assets of over €86m is a large company.

Some companies may go back and forth over these thresholds; there is specific guidance on what to do if you change company size.

Claiming through the RDEC scheme

Large companies have always had to claim through the RDEC scheme, sometimes called the Large Company scheme.

The scheme has historically had a lower rate of relief than the SME scheme, as well as limits on the costs that can be claimed. For example, large companies generally cannot claim for subcontractors through the RDEC scheme.

The main exception here is if the work was contracted out to a qualifying body (a charity, an institution of higher education, a scientific research organisation or a health service body).

However, the headline rates increased from 13% to 20% for expenditure incurred after 1^st April 2023 (which is a real-world benefit increase from 10.5% to 16.2%). Since this change, the RDEC scheme has become more attractive to claimants.

Claiming through the Merged Scheme

As with SMEs, large companies must claim through the Merged Scheme for accounting periods beginning on or after 1^st April 2024. Unlike for some SMEs, there is no alternative.

Groups

When working out if a company is a SME or a large company, group companies must be taken into account. The thresholds for staff, turnover and assets all apply to the group totals, not just an individual company.

A small company of 5 people will still be considered a large company for the purposes of R&D tax, if they are part of a large enough group.

What next?

The size of your company is only the first hurdle. There are many other limits, caveats and quirks to the R&D tax schemes, which have only got more complicated in recent months!

Knowing whether or not you can claim is not the same as knowing how to; luckily, Myriad are your trusted advisors through this process. With over 20 years of experience making R&D tax claims, we’ve seen all types of claims, for SMEs and large companies alike.

Get in touch with your questions about R&D tax claims.