To qualify for the generous SME scheme, companies must meet a modified version of the EC definition of SME, the basic criteria being:
- fewer than 500 employees, and
- either a turnover below €100m or under €86m in total assets.
Note that related companies are taken into account, which can often make the assessment complex, although there are certain exemptions for holdings by venture capital funds or universities.
How the scheme works
The scheme allows the SME to deduct an additional 130% of its qualifying R&D costs from its taxable income. A company with taxable profits will therefore benefit from a reduction in corporation tax payable, currently 26% of the qualifying R&D investment, based on the current 19% tax rate.
If the company has made a loss, then the scheme goes even further and allows the alternative of a cash payment of up to 33.35% of the eligible R&D investment, in exchange for surrendering the potential tax loss associated with a proportion of the enhanced R&D expenditure that would otherwise be carried forward.
Vital support for UK innovation
This option is, of course, very attractive to most startup companies, who may take some years to reach profitability and so prefer to realise the tax benefit of the R&D tax credits early in the life of the business.
The scheme is therefore often regarded by early-stage companies as a valuable source of funding rather than just a tax incentive.