What is the Research and Development tax relief for SMEs?
16th August 2021
If your SME is developing or modifying an existing product or service to resolve a technological uncertainty, you may be eligible for the Research and Development tax relief for SMEs. As the average claim made by SMEs in the UK is £57.338 (2018-2019), it is well worth assessing your options.
This article will discuss what it is, who can benefit from the relief, and how the relief is calculated. The research and development tax relief may aid your business in more ways than one.
What is the Research and Development tax scheme?
The research and development tax scheme for SMEs was introduced in the early 2000s to encourage and aid scientific and technological innovation. This tax scheme aims to help UK companies invest in advancing their specialty and is available to many sectors. It can include developing new products, processes, or services or enhancing existing ones.
The research and development scheme for SMEs is not only available for current projects that may be successful but also unsuccessful ones. If there was an advancement in science or technology, but the overall project was unsuccessful, you can still claim R & D tax relief.
What is qualifies for research and development?
HMRC sets out that projects that qualify for R and D but must meet specific criteria
- Your project looked for advancement in science or technology
- Your project had to overcome an uncertainty
- Your project tried to overcome this uncertainty
- It could not be easily worked out by a professional in the field
Your project can qualify for R and D even if this advancement has been achieved, but the results and details of the project are not widely available, for example, a trade secret.
The government definition is purposively broad so that many sectors and projects can benefit from the scheme.
What can I claim through the research and development relief?
Companies that can claim the eligible R and D expenditure on various costs that your business incurs throughout the project. Relief can be on direct and externally provided staff (for example, an agency involved in the project. This includes costs of salaries, wages, Class 1 National insurance contributions, and pension fund contributions.
How is the tax relief calculated?
How much you can claim through the scheme depends on several things. For SME’s the system allows companies to deduct an additional 130% of their qualifying cost from their yearly profit, plus the standard 100% deduction. This equates to a total of 230% deduction.
To calculate the research and development relief, the company needs to calculate the enhanced expenditure.
- Work out the costs that were directly tied to the R & D
- Reduce any subcontractor or external staff provider payments to 65% of the original cost.
- Add the costs together, then multiply the figure by 130%
- This will give the additional deduction to input into your tax computations
- Add this to the original R & D expenditure figure to get the enhanced expenditure figure.
What types of SMEs can apply?
The government definition is purposively broad so that many sectors and projects can benefit from the scheme. Examples include the Agri-food sector, IC, and construction. Types of companies that can apply must be registered in the UK and pay Corporation Tax to claim the relief.
For SME’s, you must employ less than 500 staff as well as your turnover being less than €100m. It is also worth noting that if the company has external investors, this can affect the status of your business as an SME. If this is the case, you may have to include the figures of the companies you are connected to (including partner companies) when calculating figures.
Speak to the experts
