“There is far more that unites us, than divides us” is a phrase that you might often here in politics. It is the same when it comes to claims for Research and Development Tax Relief.
R&D Tax Relief is a cost-based tax relief that is designed to reward companies undertaking a project that seeks an advance in science or technology through the resolution of scientific or technological uncertainty, you can read more about whether your projects qualify here.
There are now only two streams that are almost identical, with one significant difference and one largely insignificant difference to eligible expenditure. There are different qualifying criteria for each stream, and it is the qualifying criteria that create the biggest difference, and there is of course a significant difference in the financial benefits associated with each stream.
The SME Scheme is the stream for Small & Medium-sized Entities, generally, these are companies that are performing R&D for their own benefit and spending their own money. However, in some cases, they may be performing the R&D with an expected customer in mind, having identified a market need or been approached by a customer with a specific requirement, but in these circumstances, it is important to understand the contractual relationship between the SME and its customer. The work cannot be “subcontracted” to the SME, nor can it be “subsidised” by the customer. The subcontracted element would be a contractual relationship that sees the customer pay the SME for time and materials spent in developing the product. The subsidised element is one that HMRC have been pursuing recently and focusing on the commercial terms of milestone-based projects, a significant upfront payment on contract signature, might be seen as a way of subsidizing the R&D expenditure to be performed by the SME, which would then make a claim for R&D Tax Relief under the SME Scheme unviable due to the subsidy.
To qualify as a SME, the company must:
- employ less than 500 full time equivalent staff (including staff within group companies); and
- have a Turnover less than €100m; or
- have gross assets of less than €86m on the Balance Sheet
In essence a SME can be a pretty significant business. Claims under the SME scheme for a company that is in profit will generate a tax saving of up to 24.7% of the eligible expenditure, whereas a loss-making SME is able to surrender their losses for a repayable R&D Tax Credit worth up to 33.35% of their eligible expenditure.
The Research and Development Expenditure Credit stream is for businesses that don’t qualify as an SME, it also covers R&D performed by an SME for work subcontracted to it by a Large company, by an overseas entity or by an entity in the UK not chargeable to corporation tax. An SME that has also had its expenditure subsidised by either a grant, subsidy or by significant upfront payments from a customer, will be able to claim under the less rewarding RDEC stream. The tax saving under the RDEC scheme is currently 10.53% of eligible expenditure incurred after 1 April 2020, prior to that it had been worth 9.72%.
So those are the differences between the two streams, but there are still the differences between the two sets of eligible expenditure. If we look at the eligible costs for the SME Scheme, then we can discuss the one element that can’t be claimed under the RDEC stream and then the one element that can only be claimed through RDEC.
The eligible costs for the SME scheme are:
- Staff Costs – wages, salaries, bonuses, employers social security (NI) and employers pension contributions
- Subcontractors – work subcontracted out to another company on a time and materials basis;
- Externally Provided Workers – named individuals normally engaged through an agency or a connected staff provider, but not always;
- Materials – materials consumed during the research and development, including in prototypes, but only where the prototype is not intended for sale and they cannot be removed from the prototype and used in another project;
- Utilities – payments for light, heat and water, consumed in the R&D process;
- Software – both purchased and developed to support the R&D process;
- Payments to Clinical Trial Volunteers – not applicable to most claims, but perhaps very of the moment in these current times; and
- Connected Companies – payments to connected companies for all of the above costs apart from further sub-contracted costs.
The one additional expense that can be claimed under RDEC is “Contributions to independent research”, this is a payment to a qualifying body for them to perform research and development of their own choosing. The one expense that a company claiming under RDEC can’t claim for is work subcontracted to an SME company, that’s because the SME is able to claim for the work subcontracted to it by the Large company.
As you can see, there is more in common between the two streams than there are differences. If you are uncertain of your eligibility to claim, or which stream to claim under, then please get in touch to have a chat. You can book a free, no-obligation, discussion with me at www.calendly.com/simon-bulteel and find out in 15 minutes whether your company and project qualifies, or you can call us on 01424 225345.