There are different R&D schemes for SMEs and large companies. The relief provided for large Companies under the R&D Expenditure Credit (RDEC) rules is significantly less generous than that under the SME regime. In certain circumstances, SMEs are precluded from claiming relief under the SME scheme and so are forced to claim the relief under RDEC.
RDEC operates in a very different way to the traditional R&D reliefs and unlike the previous large company regime, it does provide the possibility for loss making large companies to claim a cash repayment from HMRC.
The definition of a SME for R&D purposes[1] is such that the majority of companies in the Sheffield City region are classed as SMEs, unless they are members of a larger national or international group. However, there are certain circumstances when SMEs are also forced to claim relief, either fully or in part, under the RDEC rules. These are principally when the company has received grant funding, whether this is Notified State Aid or otherwise, or the SME is operating on a sub-contract basis to a Large company. Care needs to be taken in these circumstances, as the differences between the SME and the RDEC are significant, as explained below.
The SME relief is very generous, giving an additional deduction for tax purposes of 130% of qualifying costs. For example:
* Company A, a SME, incurs qualifying costs of £100
* Company A can deduct an additional £130 (£100 x 130%) against their corporation tax
* £130 at a tax rate of 19% equates to a tax saving of almost £25 for every £100 of qualifying expenditure
Companies which do not fall within the SME definition claim relief under RDEC. Although the definitions of qualifying projects and qualifying expenditure are the same, the regime works in a very different way to the SME relief. The relief is slightly more generous than the previous Large company scheme but the main advantage is the possibility of a repayment. Taking the example of Company B:
* Company B has taxable profits of £1,000, after incurring qualifying R&D expenditure of £100
* Ignoring R&D relief, the company would have a tax liability of £190 (£1,000 x19%)
* Under RDEC, a notional credit of 12% of the cost is included in the company’s profit and loss account, above the line – i.e. taxable profits are increased to £1,012.
* The tax liability at 19% is £192.28 but the company can offset the notional credit of £12 against this – reducing the amount payable to £180.28 i.e. the tax saving is £9.72 for every £100 spent.
If Company B is loss making, then the company can elect to surrender the notional credit for repayment. This is not a straightforward process, in fact there are seven separate steps to work through, but this is a great opportunity for Large companies, and certain SMEs who have received grants or operate on a sub-contract basis, to get cash back from HMRC in respect of their R&D efforts.
In summary, the RDEC regime is significantly less generous than the R&D reliefs available for SMEs. However, even SMEs may, on occasion, have to claim relief under RDEC. The fact that RDEC allows Large companies which are loss making to receive an expenditure credit from HMRC may encourage claims from companies which have previously been put off from claiming.
The rules surrounding this relief are complex and we would advise that you seek advice from one of the Radius team if you feel this may be relevant to your company, or download a copy of our comprehensive guide with more details.
[1] A SME is defined for R&D purposes as a company with less than 500 employees and either a turnover of less than €100m or gross assets of less than €86m. This is considered on a group basis. In addition, in certain cases, the data of associated or linked enterprises also needs to be brought into the calculation.