Small and Medium Enterprise (SME) Scheme Explained

While the SME scheme ceased to be available for companies to claim for accounting periods beginning on or after 1 April 2024, it is still possible for a business to claim under the SME scheme all the way up to 30^th March 2027. You just have to meet these conditions:

• meet the SME Scheme Criteria: Less than 500 employees; and either: Turnover <€100m; or Balance Gross Assets <€86m
• file before the second anniversary of the end of the accounting period up to 30^th March 2027; and either
• notified HMRC of your intention to claim R&D Tax Relief; or
• filed a claim on an original tax return within a 3-year window that ends 6 months after the end of your accounting period; or
• filed a claim on an amended tax return before 31^st March 2023, but within a 3-year window that ends 6 months after the end of your accounting period.

If you don’t meet these criteria, please visit our ERIS & Merged RDEC scheme page.

Use the links below to jump to specific content on this page:

What makes a business an SME? | Difference between the RDEC and SME schemes | How to calculate the SME Scheme | R&D SME FAQs

What makes a business an SME?

To qualify as a Small and Medium-sized entity, the business and any connected businesses (subsidiaries and parents) must:

• Employ less than 500 Full-time equivalent staff; and
• Have either:
  • Turnover below €100m; or
  • Gross Assets on the balance sheet below €86m

  So in essence a small or medium-sized entity can be pretty big!

  If you don’t meet the criteria to qualify as an SME or you’ve received a grant or subsidy or you’ve been subcontracted to by a large or international company or an individual or partnership, you’ll be able to claim RDEC.

  An SME can claim for all of the costs that qualify apart from Contributions to Independent Research, these can only be claimed under RDEC.

The SME R&D tax relief scheme was the historic R&D relief designed to support smaller innovative companies investing in research and development.

It was aimed at eligible SMEs carrying out qualifying R&D activities, allowing them to claim an enhanced deduction against taxable profits. For loss-making companies, it could also allow qualifying losses to be surrendered in exchange for a payable tax credit.

The scheme was particularly valuable for innovative SMEs because it provided additional financial support while businesses were developing new products, processes, software, technologies or scientific solutions. It helped companies continue investing in R&D even before they became profitable.

The historic SME scheme remains relevant when considering claims for accounting periods that began before 1 April 2024. For later accounting periods, the R&D relief structure changed.

Historically, the SME R&D tax relief scheme was available to companies meeting the SME definition.

This generally required:

• Fewer than 500 employees
• Either:
  • turnover below €100 million, or
  • balance sheet total below €86 million

The calculation can also be affected by linked and partner enterprises, meaning the size and financial position of connected companies may need to be considered.

These thresholds remain important when assessing whether the historic SME scheme applied to earlier accounting periods. However, being an SME does not automatically mean a company claims under an “SME scheme” today, because the structure changed from April 2024.

The UK R&D tax relief system changed significantly from April 2024.

Historic SME R&D Relief

Used for eligible accounting periods beginning before 1 April 2024.

It provided enhanced deductions for qualifying SMEs and allowed some loss-making companies to surrender losses for a payable credit.

Merged R&D Expenditure Credit (RDEC)

The main R&D relief route for accounting periods beginning on or after 1 April 2024.

It applies to most companies carrying out qualifying R&D and provides a taxable expenditure credit.

Enhanced R&D Intensive Support (ERIS)

A more generous route for qualifying loss-making, R&D-intensive SMEs.

Eligible companies must meet the R&D intensity conditions, including the requirement that qualifying R&D expenditure represents at least 30% of total expenditure for relevant accounting periods beginning on or after 1 April 2024.

A successful R&D tax claim involves both identifying qualifying activities and preparing evidence to support them.

1. Identify qualifying R&D

Determine which projects seek an advance in science or technology and involve genuine scientific or technological uncertainty.

2. Identify qualifying costs

Review expenditure directly connected to those R&D activities, such as employee costs, software, consumables, subcontracted R&D and other eligible categories.

3. Determine the applicable scheme

The company must assess:

• Accounting period
• Company size and structure
• R&D intensity
• Contracted R&D arrangements
• Grant or subsidy considerations where relevant
• Overseas expenditure rules

4. Prepare the technical explanation

The claim should explain:

• The advance being attempted
• The uncertainty faced
• Why the solution was not readily achievable
• The work undertaken to resolve the uncertainty

5. Calculate the claim

Eligible costs are calculated under the relevant R&D relief rules.

6. Submit the required information to HMRC

Companies making R&D claims may need to submit an Additional Information Form alongside their Corporation Tax Return, providing details about the R&D projects and supporting information required by HMRC.

How to calculate the SME Scheme?

Under the SME scheme you are able to include all of the eligible costs, staff costs, materials consumed, utilities, software, payments to clinical trials volunteers at 100% of the relevant apportionment of time spent on R&D. You will also be able to claim 65% of the relevant time spent on R&D for subcontractors and externally provided workers engaged on the project.

Once you have calculated this pot of eligible costs, the tax relief allows for an additional deduction of 130% (to 1 April 2023 and then 86% after) of this pot of costs from your profits chargeable to corporation tax. If after this deduction you still have a profit then you will have made a tax saving equivalent to 24.7% of the pot of costs (after 1 April 2023, the tax saving will be equivalent to 21.5%). If however you had a significant loss before the additional deduction, you can choose to surrender that loss for a payable tax credit.

The amount of loss that you can surrender is capped at the lower of the total R&D spend (pot of costs plus additional deduction) or the loss created after the additional deduction. If you chose to surrender the loss, then you could receive a payable tax credit equivalent to 33.35% of your eligible spend (reduced to 18.6% from 1 April 2023)

 
 
 
 
 
 
 
  
 
 
 
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Learn more about SME Tax Relief

If you are interested in learning more about SME tax relief and whether you can make a claim, please get in contact with the team at Cooden Tax Consulting today. We have years of experience working with businesses of all sizes and helping them to claim tax relief on their R&D work.

We would be happy to work with you to help you maximise your R&D tax credit claim, providing helpful advice and guidance throughout.