For claims up to 31 March 2024, separate schemes exist for SMEs and large companies (from 1 April 2024, a single merged R&D scheme applies).
To qualify for the more 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 SME scheme works (until April 2024)
The scheme allows the SME to deduct an additional 86% 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 16% of the qualifying R&D investment, based on the current 19% tax rate.
Qualifying costs are:
- staffing costs
- consumable materials
- software
- externally provided workers
- payments to subcontractors, subject to a 65% restriction
- clinical trials volunteers
- data licences and cloud computing
Contract R&D and subsidies
A claim cannot be made for costs incurred on projects that have been contracted to an SME or to the extent they are subsidised (for example, by government grants). In these cases, claims can instead be made under the large company scheme.
Loss-making companies
If the company has made a loss, then the scheme allows the alternative of a cash payment of up to 18.6% 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.
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.