Choosing a suitable government R&D tax credit scheme can be a minefield. TS Partners is here to clear up the differences between SME and RDEC.
The main difference between both schemes is the size of your company. The SME R&D tax credit scheme is for, as the name suggests, small and medium-sized enterprises. In comparison, RDEC (Research and Development Expenditure Credit) is aimed at larger businesses.
HMRC treats each scheme differently. To work out which is the appropriate scheme for you, we focus on three main:
- Gross assets
- Number of staff
- Annual turnover
SME Tax Credit Scheme
To qualify for the SME R&D tax relief scheme, your business must:
- Employe under 500 employees
- Have an annual turnover of less than €100m
- Have a balance sheet of less than €86m
As we illustrate further in the article, this scheme is the more generous of the two schemes. Your business could qualify for R&D tax credits, regardless of the sector, so long as you can prove time and money was invested into research and development. Your project doesn’t have to be successful either, as the tax relief is aimed to reward innovation and not success.
The Research and Development Expenditure Credit (RDEC)
The RDEC scheme, also known as Above-the-Line, was introduced in the Finance Act 2013. The RDEC aims to allow larger companies with no Corporate Tax liability to benefit from a lump sum of cash or a tax reduction for their R&D activities. The most significant difference between both schemes is that RDEC R&D tax credits can be claimed as “above-the-line” taxable income instead of below-the-line benefit.
Companies who qualify for RDEC have:
- Over 500 members of staff
- An annual turnover of over €100m
- A balance sheet of €86m or more
Can SMEs Claim the RDEC Scheme?
There are instances where SMEs can claim the RDEC scheme. This option will only be available for SMEs if their R&D project doesn’t qualify for the R&D tax credit scheme for the following reasons:
- Your company received state aid or a grant to help fund your R&D project.
- Your company is subcontracted by a larger business to perform the R&D work.
If you think your SME doesn’t qualify for the R&D tax credit scheme, then check your eligibility for RDEC. However, the best way to find out which government tax credit scheme applies to you is by asking our Experts.
What Level of Tax Relief Does Each Scheme Offer?
The R&D Tax Credit Scheme for SMEs is the most generous of the two schemes. However, the scale of operations for larger companies means that, although the RDEC offers a lower rate, these companies still get substantial amounts of tax relief.
R&D Tax Credits:
- Allows SMEs to take off an extra 130% of qualifying R&D costs from their annual profit, adding to a total of 230% reduction.
- Tax credits can be claimed for a loss, too, with a value of up to 14.5% for the surrenderable loss.
- Offers 13% of qualifying R&D expenditure back.
- 11p for every £1 spent on R&D.
- Paid in either a lump sum or offset your corporation tax liability.
- It can be shown as income in your account, as it can be written as “above-the-line”.
Other Differences Between the SME and RDEC Schemes
While both schemes are different, they are the same regarding what qualifies as an R&D project. The definition of what R&D activities qualify is the same, regardless of which scheme you are looking to claim.
Besides different relief rates available, each scheme has different qualifying costs.
Under the SME R&D tax relief scheme, you can include up to 65% of subcontractor cost, so long as the subcontractor performed the work within the UK. In contrast, the RDEC has strict restrictions on what subcontractor costs you can include in your claim. You may include charity or scientific research organisation costs, but not other subcontractor costs.
One of the main advantages of RDEC is that your business can still qualify for tax relief even if you receive government funding for the project. However, SMEs claiming under the R&D Tax Credit scheme can’t claim if they’ve received government funding.
We hope this guide helps you identify which scheme your business qualifies for, but if you are unsure about any step of the R&D tax credit claiming process, don’t hesitate to get in touch. Our experts can guide and assist you on every step of the process, from identifying if your project qualifies to submitting the claim to HMRC on your behalf.
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