SME & RDEC: Both R&D Tax Credit Schemes Explained

Eligible activities can earn you up to 33% back on your R&D spend, so it's worth finding out if your organisation qualifies

If eligible, you will be able to claim via one of the two branches of the scheme:

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

Which one is right for you? Our guide explains the key differences between them.

Where did R&D tax credits come from?

In 2000, the UK government launched its R&D tax relief scheme.

This measure was created to support large businesses who were undertaking research and development activities and in the case of smaller firms, encourage R&D that might otherwise be too expensive or too impractical for them to take on.

The aim of the R&D tax relief incentive is to reimburse companies for some of the costs associated with research and development and thus promote growth, innovation and global competitiveness for UK businesses

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 as it can be rather complex.

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

• Seeking to achieve an advance in science or technology
• Seeking to achieve an advance in science or technology through the resolution of scientific or technological uncertainty
• To which answers to the above scientific or technological uncertainties are not available or readily deducible by a competent professional in the field

💡It’s important to note that 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 you meet the eligibility criteria mentioned above.

Also, if the criteria sounds  confusing and you’re not quite sure whether you qualify then we encourage you to get in touch. Unlike other advisors, we don’t employee Sales or Business Development staff and so we won’t be trying to ‘Sell’ you on anything. Our advisors have years of experience in R&D tax credits and will be able to give you a straight answer as to whether your activities are in tune with what HMRC considers R&D.

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 corporation tax reduction or refund (if the CT liability prior to any R&D tax relief has been paid in full)
2. A payable tax credit
3. An increase in the Company's trading losses

Claims for R&D tax relief can be made up to 2 years following the end of the accounting period in which the R&D project took place.

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

You can claim relief on costs that have been expensed through the Profit & Loss account and in certain circumstances you can also claim capitalised expenditure (providing that the assets purchased have been classified as Intangible Assets).

The main areas of costs that can be claimed are:

• staff costs (Incl. gross pay, employer's NI, reimbursed expenses and employer's pension contributions);
• agency workers (externally provided workers);
• subcontractors/freelancers;
• software license costs;
• consumable items (heat, light and power, and materials and equipment used or transformed by the R&D process); and,
• payments to the subjects of clinical trials.

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 you?

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% (Reducing to 86% for expenditure incurred on or after 1st April 2023) 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, the company can choose to surrender their losses to HMRC in exchange for a payable tax credit worth 14.5% of the losses surrendered. Reducing to 10% from 1st April 2023

The Research and Development Expenditure Credit (RDEC)

The RDEC incentive, was first introduced in the Finance Act 2013.  The biggest difference between the RDEC scheme and the SME scheme is that RDEC is applied above the line compared to SME which is given as a below the line deduction..

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 currently claim back 13% of their eligible R&D expenditure (the RDEC rate will increase to 20% 1st April 2023). 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 has 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 any grant funding or subsidy not just notified state aid.

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 here at Myriad Associates apply a unique methodology when navigating through the complexities of the R&D tax claims process. To secure the R&D tax relief you're eligible for, we maintain a holistic approach. First, we’ll work to understand the technical and scientific uncertainties your project faced in order to ensure we meet HMRC's strict R&D tax credits criteria.  Then, we’ll use that information to build a robust technical report, collate all the relevant costs and calculate the benefit owed for inclusion in your company’s tax return. We’ll also happily handle any enquiries from HMRC should they arise. The claims criteria can be difficult to understand and so enquiries are becoming a more regular occurrence as HMRC works hard to tackle abuse of the scheme.

Do you need help with an HMRC enquiry?

Has your R&D tax relief claim attracted the attention of HMRC? Don’t panic.

Enquiries into R&D tax relief claims by HMRC are on the rise. Our highly-qualified team will provide the utmost support to secure a beneficial resolution for your HMRC R&D enquiry, so that you can rest assured knowing your business is in safe hands.

We are well equipped to offer actionable advice on any R&D tax relief enquiries made by HMRC as well as provide proactive reviews that can help ensure complete peace of mind during these uncertain times.

If you’ve been contacted by HMRC about your R&D Tax Credit claim, or you’d simply like to know more, please do get in touch using our contact form or call our friendly team on 0207 118 6045.

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