R&D tax relief for SMEs

A company is classed as an SME if it has:

• total staff of fewer than 500 people and
• a turnover of less than €100 million or balance sheet assets of less than €86 million

Connected companies may need to have their figures included for assessing SME thresholds, depending on the connected company’s classification:

• Autonomous – where no external corporate entity owns 25% or more of its shares, and if it does not own 25% or more of any other company
• Linked enterprise – able to exercise control over the affairs of the other company, usually through holding greater than 50% of company voting rights
• Partner enterprise – not linked, but holds between 25% and 50% of voting rights

Various costs can qualify for relief:

• Staffing costs (including gross salaries, wages, overtime pay, and cash bonuses), employer national insurance contributions and employer pension contributions
• Subcontractor payments for activities part of the company’s R&D. The subcontractor’s activities need not be R&D considered in isolation as long as they are part of a larger R&D project. Subcontracted analytical testing, for example, may qualify. Only 65% of the total subcontractor costs can be eligble for R&D relief
• Costs of externally provided workers (EPWs), which are the staff costs paid to external agencies for workers directly and actively engaged in the R&D project. EPWs must carry out R&D activities under the claiming company’s supervision, direction or control. Only 65% of the total EPW costs can qualify for R&D relief
• Consumables, which are materials consumed or transformed in the R&D process, including utilities such as water, fuel, and power
• Software, including the cost of software licences used in the R&D activities
• Data licences and cloud computing utilised in the R&D activities

SME R&D reliefs can benefit your business, whether it makes a profit or loss.

• SMEs can deduct extra qualifying costs from their yearly profit
• If the company makes a loss, it can claim a tax credit worth a proportion of the loss that can be surrendered

The rates of the enhanced deduction and tax credit changed from 1 April 2023.

*There is an increased R&D tax credit of 14.5% for R&D intensive loss-making SMEs with qualifying R&D expenditure worth 40% or more of total expenditure for an accounting period. This will only be applicable once legislated.

SME R&D relief allows companies to deduct extra qualifying costs from their profit for tax purposes.

Before 1 April 2023, an extra 130% of qualifying costs can be deducted and the net benefit (at a 19% corporation tax rate) is therefore 24.7% of the qualifying R&D expenditure.

After 1 April 2023, an extra 86% of qualifying costs can be deducted, and the net benefit (at a 19% - 25% corporation tax rate) is therefore 16.3% - 21.5% of the qualifying R&D expenditure.

In some cases, the net benefit received may be lower when the enhanced deduction takes a company from a taxable profit to a taxable loss position.

From 1 April 2023, companies with profits lower than £250,000 can claim marginal relief. This will result in a marginal tax rate of between 19% and 25% and affect the SME R&D relief net benefit.

For companies making a loss, SME R&D relief allows them to claim a tax credit as a percentage of its loss that can be surrendered.

The surrenderable loss is equal to the lesser of:

• The unrelieved trading losses
• The qualifying expenditure plus the enhanced deduction

The enhanced R&D deduction is subtracted from trading profits to give the unrelieved trading loss in the period. SME R&D relief allows companies to surrender losses in exchange for a cash credit.