Specialist R&D Tax & Grant Funding Advisors

SME vs RDEC: R&D Tax Credit Schemes Explained

If an organisation is carrying out R&D work, it may be able to claim R&D Tax Credits using one of two branches of the scheme.

Barrie Dowsett

Chief Executive Officer


7 minute read

Research and development (R&D) Tax Credits can offer a substantial - and much welcomed - cash injection for innovative UK companies. If an organisation is carrying out R&D work, it may be able to claim R&D Tax Credits using one of two branches of the scheme:

  • The SME (Small-Medium Enterprise) branch, and/or
  • The Research and Development Enhanced Credit (RDEC) scheme

Understanding the differences between the schemes is a vital first step in making your application. Here we’ll look at the key differences between them.

Where did R&D tax credits come from?

Back in 2000, the UK government unveiled its R&D tax relief scheme to encourage innovation, growth and global competitiveness. The introduction of the R&D tax relief scheme showed UK based companies that the government understood that innovative work could be expensive, and for many smaller businesses, prohibitive or simply not possible.

The idea behind the R&D tax relief incentive is that it allows companies to reclaim some of the money they’ve spent on eligible research and development activities.

What counts as R&D work?

For tax purposes, what HMRC considers to be R&D, and what company executives may understand as R&D, are sometimes two completely different things. That’s why it’s so important to work with R&D tax specialists such as ourselves when making an R&D tax credit claim. It’s a rather tricky, grey area.

In a nutshell, for tax purposes HMRC considers that a company has undertaken R&D work when they are:

  • Looking to overcome a specific technological or scientific uncertainty
  • Making an advancement in technology or science
  • Making progress that isn’t easily achievable by a competent professional in the field
  • Creating new products, processes or services
  • Changing or modifying an existing product or service

What are the benefits of claiming for R&D tax relief?

R&D Tax Credits serve to either increase a company’s taxable losses or reduce its taxable profits. There are three main types of tax benefit that come from a successful application for R&D Tax Credits:

  1. A rebate of Corporation Tax
  2. A payable tax credit
  3. An enhanced deduction which companies can choose to carry forward if they wish

It’s worth noting that claims can go back as much as two years after the R&D project has occurred.

What’s classed as 'eligible expenditure' in a claim for R&D Tax Credits?

For qualifying R&D activities, eligible expenditure can be anything that’s been spent on:

  • Staffing costs (employees and agency workers)
  • Consumable or transformable materials (eg. water, fuel and power)
  • Subcontractor costs (depending on the scheme)
  • Payments to clinical trials subjects
  • Certain types of software

It also applies to utilities and materials that were ‘transformed or consumed’ in the process, such as materials, chemicals, batteries and some types of tools.
It doesn’t even matter if your R&D project was successful or not. You’re still entitled to claim for R&D tax relief as long as some risk was taken in making a technological or scientific advancement. Essentially, it’s the R&D activity that’s important, not the outcome of the project.

So, what exactly is the difference between the SME branch of the R&D tax relief scheme and the RDEC branch?

Which R&D tax relief scheme is right for me? SME vs RDEC?

As we established earlier, the SME R&D tax credit scheme is designed for small to medium-sized businesses and the RDEC scheme is for larger corporations.

HMRC treats both types of companies and schemes differently. In working out which type of R&D tax relief a business is eligible for, we look at three main areas:

  1. Gross assets
  2. Staff numbers
  3. Turnover

SME R&D tax relief

To claim R&D Tax Credits using the SME scheme, companies must:

  • Employ no more than 500 members of staff
  • Have a turnover of under €100m
  • Have a balance sheet under €86m

The SME scheme allows profitable organisations falling within these brackets to deduct an extra 130% of their eligible R&D expenditure from their taxable profit. This is over and above the standard 100% deduction which means a 230% tax deduction in total. For businesses that have made a loss, a claim can be made that’s worth up to 14.5% of the surrenderable loss.

The Research and Development Expenditure Credit (RDEC)

The RDEC incentive, also known as ‘Above-the-Line’, was first introduced in the Finance Act 2013. It was designed to allow larger companies with no Corporate Tax liability to benefit through a cash payment or a reduction in tax for their innovative projects. The biggest difference between the RDEC scheme and the SME scheme is that RDEC allows companies to claim R&D credits as “above-the-line” taxable income, rather than as a below-the-line benefit.
To apply under RDEC, companies must have:

  • A staff headcount of over 500
  • A turnover of €100m or more
  • At least €86m in gross assets

RDEC allows bigger organisations to claim back 13% of their eligible R&D expenditure which often adds up to some serious money. In fact, statistics suggest that the average RDEC claim is worth over £500,000!
It’s worth remembering that SMEs can claim under RDEC in certain circumstances.

For example, if an SME cannot claim using the SME scheme because they have been subcontracted by another company, then RDEC will need to be used instead. RDEC will also need to be used if the project has received notifiable state aid (grants).

Why choose Myriad Associates to help with your R&D tax claim?

Myriad Associates has been managing R&D Tax Credit claims for nearly two decades, assisting a broad range of companies up and down the country. No matter what size or sector your company is in, we can help.
We understand how important R&D Tax Credits are, both to individual companies and the wider economy as a whole. However, because the government is keen to maintain the scheme’s success, they often update the rules and regulations around these R&D tax schemes, which can get confusing. This is where we come in.

The expert team of R&D tax advisors at Myriad Associates apply a unique methodology when navigating through the complexities of the R&D tax claims process. To secure the maximum amount of R&D tax relief possible for your company, they maintain a holistic approach. First, we’ll gather all the information together for your claim. Then, we’ll then deal with the technical report, collate all the relevant costs and calculate the benefit owed for inclusion in your company’s tax return. We’ll even take care of any HMRC queries to make the whole process as hassle-free as possible.

Due to our blend of expertise and industry experience, we know exactly how to identify the eligible R&D work and expenditure that’s taken place. We can also capture relevant spend in areas such as direct and indirect staffing, consumables, subcontractors, software and prototypes.

Get in touch with the R&D tax relief experts at Myriad Associates

Whatever stage you’re at in your claim for R&D Tax Credits, simply contact us on 0207 118 6045 or use our contact page.

Whether you need full support from start to finish or simply have a quick question, we’re here to help.

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