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The SME scheme

The SME scheme is for ‘Limited’ companies or organisations with fewer than 500 employees and either annual sales not exceeding  €100m OR a gross asset balance sheet not exceeding €86m. Your company or organisation is only able to claim R&D relief if it’s liable for Corporation Tax.

Companies carrying out R&D are likely to qualify for the relief. The definitions of eligible R&D and costs are quite broad, and eligible R&D activities can frequently be found in previously overlooked activities.

However, in order to make a claim for this relief, careful attention needs to be given to ensuring that key principles are met. To be eligible under the terms of the scheme the R&D must be:

  • seeking to achieve an advance in science or technology
  • subject to scientific or technological uncertainty

Companies that are improving, or developing new products and processes and are tackling “technological uncertainty” are likely to qualify. This is usually the case for many engineering, manufacturing, technology and software development companies. The eligible costs incurred as part of the development activities include those for staff, materials, subcontracting and utilities.

From 1 April 2012, the rate of tax relief on allowable R&D costs was increased to 225%. This means that for each £100 of qualifying costs, your company or organisation could have the income on which Corporation Tax is paid, reduced by an additional £125 on top of the £100 you have spent. From 1 April 2015 the rate of tax relief on allowable R&D costs was further increased to 230%.

Loss-making businesses are able to claim R&D Tax Credits and surrender them for cash. The applicable rates and sample calculations are shown below.

Rates

Period                                           Uplift                        Super Deduction                      Surrender Rate
Before 31st Mar 2011

75%

175%

14%

Apr 1st 2011 – 31st Mar 2012

100%

200%

12.5%

Apr 1st 2012 – 31st Mar 2014

125%

225%

11%

Apr 1st 2014 – 31st Mar 2015

125%

225%

14.5%

Apr 1st 2015 -

130%

230%

14.5%

A profit making SME may reduce its Corporation tax bill based on the applicable uplift rate.

Corporation Tax reduction – sample calculations

Example 1

R&D expenditure £100,000
No Relief With Relief
Taxable trading profit £150,000 £150,000
R&D Uplift @125% 0 £125,000
Revised profit £150,000 £25,000
CTR @20% £30,000 £5,000

Tax saving: £30,000 – £5,000 = £25,000

Example 2

R&D expenditure £100,000
No Relief With Relief
Taxable trading profit £150,000 £150,000
R&D Uplift @ 130% 0 £130,000
Revised profit £150,000 £20,000
CTR @20% £30,000 £4,000

Tax saving: £26,000

* CTR – Corporation Tax Rate

If an SME is loss making, then it has an opportunity to surrender R&D tax credits for cash. The amount surrendered is the lesser of the amount of the unrelieved trading loss sustained in that period or the super deduction (%) of the related qualifying R&D expenditure.

Cash surrender – sample calculations for super deduction

Example 1

Qualifying R&D Expenditure £100,000
Super deduction @ 200% £200,000
Surrender rate (%) 12.5

Payable credit: £200,000 * 0.125 = £25,000

Example 2

Qualifying R&D Expenditure £100,000
Super deduction @ 225% £225,000
Surrender rate (%) 11

Payable credit: £24,750

Example 3

Qualifying R&D Expenditure £100,000
Super deduction @ 230% £230,000
Surrender rate (%) 14.5

Payable credit: £33,350