Small to Medium Enterprises (SMEs) primarily use the SME Scheme for their R&D Tax Relief claims when they have funded the project themselves; however, there are some occasions where a SME needs to use the RDEC (Research and Development Expenditure Credit) Scheme.
The SME Scheme is certainly more generous – returning between £18 to £33 per £100 spent, depending on profit (loss) – but there are some circumstances in which a SME is simply unable to claim via the SME scheme. These include:
SMEs can claim under the RDEC for these types of projects.
The RDEC scheme is primarily aimed at large UK companies with over 500 employees. Like the SME Scheme, it offers tax relief on the money a business has invested in research and development activities.
Before 1st April 2020, the RDEC Tax Relief rate was 12%, and post this date the rate increased to 13%. This means that after tax, a company can receive between £9.57 and £10.53 for each £100 spent on qualifying R&D. The table below shows how this is calculated:
If a SME company has undertaken an R&D project which was funded through a grant or subsidy, then the SME Scheme does not allow a claim to be made against the grant funded project. The RDEC Scheme, however, does allow a claim.
Most grant funding is only for a percentage of a project’s costs. For example, a project that is 70% funded, means that the remaining 30% is match-funded, usually by the SME company.
Under RDEC, a company receiving a Notified State Aid Grant* may be able to claim against the entire project costs for eligible expenditure on items such as materials, consumables, staff, research institutes (Universities typically), and Externally Provided Workers (EPWs). If the grant is Non-Notified State Aid* (often De Minimis) then the company may also be able to claim via the SME scheme for the 30% self-funded portion, with 70% of eligible costs claimed through the RDEC scheme.
*Please Note: this is to be considered on a case-by-case basis due to State Aid rules.
Businesses of all sizes will very often subcontract work to specialists, who carry out R&D on their behalf. This is especially common when a business does not have the required skills or facilities in-house. Examples of commonly subcontracted activities include software development, design work, computational analysis, or laboratory/bench tests.
If a SME is subcontracted by another SME client, then the client will usually make a claim for those R&D activities via the SME Scheme.
However, if an SME is subcontracted by a large company client, then the SME can only make a claim via the RDEC Scheme for their eligible expenditure. So the SME sub-contractor has been paid to carry out the R&D, maybe made a profit on this, but can still claim through the RDEC relief scheme.
Please Note: This will need to be considered on a case-by-case basis due to ownership of IP and R&D.
In the first instance, we urge SMEs to check their eligibility and make a claim via the SME Scheme as it’s the most beneficial at up to 33% tax relief. If for any reason you’re unable to claim, then RDEC is not just for SMEs and should be considered!
There are many intricacies to both the SME and RDEC Schemes. Our advice is to consult an R&D Tax expert if you’re a SME wanting to claim via the RDEC Scheme to ensure eligibility.
If you’d like to discuss using the RDEC Scheme as a SME, our consultants would be happy to speak to you to decipher your eligibility and your potential claim value! Contact us here.