Research and Development Tax Credits have many benefits. It can be a great way to add some extra cash to existing businesses in return for innovative practice, the claim itself can actually be claimed up to 2 years after the end of the accounting period that it relates to, meaning that many businesses are owed more than what they originally thought. When it comes to determining whether the SME or RDEC Scheme is right for you, it comes down to many factors.
What is the SME Scheme?
The SME scheme was introduced in 2000 and is specifically designed for small-medium sized enterprises. It allows companies to deduct an extra 130% of their qualifying R&D costs from their yearly profit, along with the normal 100% deduction which totals at a 230% deduction; SME’s can also claim 65% of relevant costs if they have used a sub-contractor for their R&D activities. The SME Scheme also allows businesses to claim a tax credit if the company is loss-making, which is worth up to 14.5% of the Surrenderable Loss.
The main factors that make you eligible to claim under the SME scheme are:
– Having a staff count of less than 500.
– A turnover of under £100 million or a balance sheet under £86 million.
It is important to note that if your company has external investors, then this could affect your status as an SME, you may be required to include the figures of companies connected to you and partner companies to determine whether you will be classed as an SME.
Companies that have never claimed before can qualify for Advance Assurance also, which is used to give companies a guarantee that any R&D claims will be accepted if they are in line with what was discussed and agreed, and claimed within the first 3 accounting periods. Advance Insurance is not needed to process a business’s first R&D Claim, but it can be a safety net for businesses that have never claimed before.
You can apply for Advance Assurance if you are classed as an SME, you are planning an R&D Project or have already completed one and also if you are part of a group and no companies linked to you have made a claim before. You will not be able to apply for Advance Assurance if you are entered into Disclosable Tax Avoidance Scheme (An arrangement designed to give tax or National Insurance advantage), and also if you are a corporate serious defaulter.
The average claim for SME’s in 2020 was £95,238 which is a £10K rise year after year for this scheme.
What is the RDEC Scheme?
The RDEC incentive was introduced in 2013, replacing the Large Company Scheme already in place. It was designed to make it possible for larger companies with no Corporate Tax Liability to reap benefits through a cash payment or reduction in tax for innovative activity. The RDEC Scheme allows larger organisations to claim back 13% of their eligible R&D Expenditure which can be extremely large amounts of money.
The main factors that will make you eligible to claim under the RDEC Scheme are:
– Having a staff count of 500 or over.
– A turnover of £100 million or more.
– At least £86 million in gross assets.
RDEC can actually be claimed by small and medium-sized businesses also who have been sub-contracted to carry out R&D work by a large company, or if the project has already received notifiable state aid (grants). This may also be an option for small businesses that cannot claim under the SME scheme. The RDEC Credit is calculated at 13% of your company’s qualifying R&D expenditure, it is important to keep in mind that if your company is loss-making, the credit may be used to discharge the liability OR result in a cash payment.
The average claim amount for the RDEC Scheme is often a lot higher than that of an SME Scheme, this is due to larger companies having more R&D projects and expenditure, the average claim for this scheme is over £500,000.