R&D is a Corporation Tax (CT) tax relief that may reduce your company’s tax bill. This tax relief can only be claimed if your company is liable for CT.

A small or medium sized enterprise (SME) is a company with less than 500 employees with either:

  • an annual turnover under €100 million
  • a balance sheet under €86 million

Your company isn’t an SME if it’s part of a larger enterprise that, when taken as a whole, would fail these tests.

When considering these limits, you should also include any linked, partnership or shareholding companies that have at least a 25% share in your company and/or any company that your company holds a 25% share in.

The definition of an SME for R&D Relief purposes isn’t necessarily the same as that used by HM Revenue and Customs (HMRC) in relation to other areas of Corporation Tax or other tax areas like PAYE, or by other government agencies.

The SME tax relief scheme
You can only claim under the scheme for SMEs if your company meets the definition of a SME for R&D tax relief purposes.

In certain specific situations, even if your company meets the definition of an SME, you may not be able to claim relief under the SME scheme. But, you may be able to claim under the Large Company Scheme. This means that, if your company is small or medium-sized, you may be able to claim R&D tax relief under the SME Scheme for one project and the Large Company Scheme for another.

You can only claim R&D tax relief as a SME if your company is a going concern and not in administration or liquidation when you make your claim. If you’ve made a claim and the company then ceases to be a going concern you can’t get a tax credit.

Subsidies and grants
If your company receives a subsidy or grant for an R&D project, this may affect how much tax relief you can claim. If the subsidy or grant is a ‘state aid’ recognised by the European Commission, then you can’t claim anything under the SME Scheme.

For other types of subsidy or grant, the R&D expenditure you can claim for is reduced by the amount of subsidy or grant received. You may be able to claim under the Large Company Scheme instead.

Find out whether a grant will reduce the amount of R&D tax relief you can claim.
Find out whether a subsidy will affect a claim for R&D tax relief.

Rate of tax relief
This scheme has higher rates of relief, from 1 April 2015. The tax relief on allowableR&D costs is 230%. This means that for every £100 of qualifying costs, your company could reduce your CT by an additional £130 on top of the £100 spent.

Example – R&D tax relief for expenditure of £20,000 where the company has made a profit of £26,000:

R&D expenditure: £20,000
R&D Relief: £20,000 × 130% = £26,000
Normal taxable profit: £26,000
Taxable profit less R&D Relief: £26,000 – £26,000 = 0
Revised taxable profit: 0

If your company has an allowable trading loss, this can be increased by 130% of the qualifying R&D costs – so that’s £130 for each £100 spent. This loss can be carried forward in the normal way, but only if you choose not to convert it to tax credits.

Example – R&D tax relief for expenditure of £20,000 where the company has made a loss of £10,000:

R&D expenditure: £20,000
R&D enhancement: £20,000 × 130% = £26,000
Normal trading loss: £10,000
Trading loss less enhanced by R&D tax relief: £10,000 + £26,000 = £36,000
Loss available to carry forward or back for Corporation Tax purposes: £36,000.

R&D tax credits
If your company makes a loss, you can choose to receive R&D tax credits instead of carrying forward a loss. It’s a cash sum paid to you by HMRC – if your company has PAYE and National Insurance contributions liabilities for the same period.

The amount of tax credit you can receive is limited to the total of PAYE and National Insurance contribution liabilities, but it does include liabilities for all directly employed staff – not just those working on the R&D project.

Example – converting R&D tax relief on expenditure of £20,000 to a tax credit payment for accounting period commencing 1 April 2015 and ending 31 March 2016:

R&D expenditure: £20,000
R&D enhancement: £20,000 × 130% = £26,000
Normal taxable profit: £6,000
Trading loss (after R&D tax relief): £20,000
R&D expenditure qualifying for conversion to credits: £20,000
Potential tax credit: £20,000 × 14.5% = £2900
Payable tax credit: £2,900
Losses available to carry forward or back: Nil.

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