Some SMEs don’t qualify for the Research and Development (R&D) SME scheme due to the way a project is funded. This help sheet sets out important information in relation to enhanced claims for R&D work that are available to SMEs who don’t qualify for the SME scheme.
Who is eligible for the SME scheme?
Companies will normally qualify as an SME if they, including linked or partner enterprises, have:
- Not more than 500 employees; and
- Less than €100m of turnover or €86m of total assets
However, companies meeting these criteria might not be eligible for the SME scheme if they:
- Have been funded, partly or in full, by State Aid
- Have received subsidies for part or all of the project
- The project was funded by someone else (for instance if it has been subcontracted to the SME)
Where a company ceases to be eligible, it could be eligible for the Large scheme if it carries out qualifying R&D.
What is the relief available under the large scheme?
The most attractive relief available to a company claiming under the large scheme is a research and development (RDEC) credit. Companies are eligible for a taxable credit of 10% or 11% (8% or 8.8% net) of total qualifying R&D expenditure, depending on the timing of expenditure.
The credit can be set against the company’s tax liability for a current or another (appropriate) period, group relieved, set against other outstanding tax liabilities or any excess paid to the company in cash.
Alternatively, companies could opt (until June 2016) for an additional deduction of 30% from trade profits however with the reduction in corporation tax rates in recent years this is less effective than the RDEC credit.
What is qualifying R&D?
The DTI guidelines state that R&D is qualifying where there is a project seeking to achieve an advance in science or technology by:
- Extending overall knowledge in a field
- Creating a process, device, product or service which represents an increase in overall knowledge or capability within a field
- Making an appreciable improvement to an existing process, material, device, product or service through scientific or technological changes
- Using science or technology to develop an existing process, material, product or service in a new and appreciably improved way
In practical terms, any project undertaken by company which faces challenges or difficulties into which money and/or time has been invested (whether successful or not) may qualify for relief.
Who might benefit from the relief?
- Companies who receive State Aid funding for innovative projects (e.g. Technology Strategy Board grants)
- Companies who subcontract for large companies in the innovation process (e.g. resolving a specific challenge, producing bespoke products or tailored software).
- Companies developing new, or improving existing, products or processes which have been subsidised in some way
- Companies who are industry leading or innovative
What expenditure can be included in the claim?
Expenditure incurred in the resolving of technological or scientific uncertainty can be included in relation to the following:
- Staff costs of employees involved, apportioned based on their time spent on qualifying activities
- Items which are consumed in the R&D process, for instance in materials used in developing prototypes as well as fuel, power or water consumed in the process.
- Externally provided workers (normally restricted to 65% cost) such as agency workers involved in R&D.
- Software used in R&D, apportioned between qualifying and non-qualifying activities.
- Other qualifying indirect activities
- In limited circumstances, costs of certain subcontractors involved in the R&D process (normally restricted to 65% cost), for instance universities or charities.
Making a claim
Claims are made through the company’s corporation tax return and these R&D tax claims are reviewed by specialist units at HMRC. As such it is important that sufficient information is provided alongside the computation for the claim to be processed. This includes details of:
- The nature of the project
- The scientific or technological advances sought
- The scientific or technological uncertainties encountered and how and when they were resolved
- Why the advances were not readily deducible by a competent professional
- Details of qualifying expenditure
How can Menzies help?
- Menzies Innovation and R&D Team works in partnership with clients and other professionals to provide a commercially relevant and effective tax planning service, from concept development through to collating and presenting claims in a format to expedite the R&D claims process. This includes:
- Navigate you through the claims process from recording, reporting and final submission
- Identifying and, improving methods for identifying, qualifying expenditure to maximise effectiveness of the reliefs
- Specialist knowledge of the R&D tax regime
- Establishing eligibility under the various schemes
- Identifying, and developing systems to identify, qualifying projects
- Presenting information to minimise exposure to challenges from HMRC
- Considering other relevant or complementary tax reliefs that may arise from the development process