A short guide to SME R&D tax credits
R&D tax relief is a government scheme which encourages businesses to invest in the development of their own services, products, or systems. The scheme rewards businesses who do so through reductions to their corporation tax or offering cash payments / R&D tax credits.
R&D tax credits go a long way in funding company innovation. In this article, we are examining the SME branch of the scheme specifically.
How does R&D tax relief work and what types of activity qualify?
R&D tax credits enable UK companies to 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.
Before considering any claim for R&D relief, you must ensure that your project meets the following criteria:
- You must have looked for an advance in science or technology and aimed to achieve this advance.
- You must have had to overcome a scientific or technological uncertainty and attempted to overcome this.
- This must not be a project that could easily be carried out by another professional in the field.
If you can prove that your project is innovative to your industry and not just your company, and you can detail the specific improvements to the product, system or service, you may be eligible for the scheme.
It doesn’t 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.
How is an SME defined and which R&D incentive scheme applies to my business?
Companies with fewer than 500 staff and either no more than €100 million turnover or €86 million gross assets are classed as SMEs. Most companies, including start-ups, fall into this category.
If you are classed as an SME for R&D tax credit purposes, your next step will be to make a claim via the SME R&D tax incentive. There are however a few factors such as grants and subcontracting that can restrict an SME from accessing the SME incentive which might mean you need to make a claim via RDEC or via both schemes.
Since 1 April 2023 there have been some cuts to the scheme although claims can be very lucrative, especially for research-intensive startups (in fields like AI, life sciences and fintech) that spend more than 40% of their total expenditure on R&D who will be able to claim £27 for every £100 spent on R&D.
Get in touch
If you are unsure if your project will qualify for R&D tax credits, get in contact with us. We help SMEs across all sectors to claim R&D tax credits.
The information was correct at time of publishing but may now be out of date.