The Difference between SME and RDEC R&D Tax Credit Schemes| TS Partners
by Liz Seyi Digital marketing managerChoosing
a suitable government R&D tax credit scheme can be a minefield. TS Partners is here to clear up the
differences between SME and RDEC.
The
main difference between both schemes is the size of your company. The SME
R&D tax credit scheme is for, as the name suggests, small and medium-sized
enterprises. In comparison, RDEC (Research and Development Expenditure Credit)
is aimed at larger businesses.
HMRC
treats each scheme differently. To work out which is the appropriate scheme for
you, we focus on three main:
- Gross assets
- Number of
staff
- Annual
turnover
SME Tax Credit
Scheme
To
qualify for the SME R&D tax relief scheme, your business must:
- Employee under 500 employees
- Have an
annual turnover of less than €100m
- Have a
balance sheet of less than €86m
As
we illustrate further in the article, this scheme is the more generous of the
two schemes. Your business could qualify for R&D tax credits, regardless of
the sector, so long as you can prove time and money was invested into research
and development. Your project doesn’t have to be successful either, as the tax
relief is aimed to reward innovation and not success.
The Research and
Development Expenditure Credit (RDEC)
The
RDEC scheme, also known as Above-the-Line, was introduced in the
Finance Act 2013. The RDEC aims to allow larger companies with no Corporate Tax
liability to benefit from a lump sum of cash or a tax reduction for their
R&D activities. The most significant difference between both schemes is
that RDEC R&D tax credits can be claimed as “above-the-line” taxable income
instead of below-the-line benefit.
Companies
who qualify for RDEC have:
- Over 500
members of staff
- An annual turnover
of over €100m
- A balance
sheet of €86m or more
Can SMEs Claim
the RDEC Scheme?
There
are instances where SMEs can claim the RDEC scheme. This option will only be
available for SMEs if their R&D project doesn’t qualify for the R&D tax
credit scheme for the following reasons:
- Your company
received state aid or a grant to help fund your R&D project.
- Your company
is subcontracted by a larger business to perform the R&D work.
If
you think your SME doesn’t qualify for the R&D tax credit scheme, then
check your eligibility for RDEC. However, the best way to find out which
government tax credit scheme applies to you is by asking our Experts.
What Level of
Tax Relief Does Each Scheme Offer?
The
R&D Tax Credit Scheme for SMEs is the most generous of the two schemes.
However, the scale of operations for larger companies means that, although the
RDEC offers a lower rate, these companies still get substantial amounts of tax
relief.
R&D
Tax Credits:
- Allows SMEs
to take off an extra 130% of qualifying R&D costs from their annual
profit, adding to a total of 230% reduction.
- Tax credits
can be claimed for a loss, too, with a value of up to 14.5% for the
surrenderable loss.
RDEC:
- Offers 13%
of qualifying R&D expenditure back.
- 11p for
every £1 spent on R&D.
- Paid in either
a lump sum or offset your corporation tax liability.
- It can be
shown as income in your account, as it can be written as “above-the-line”.
Other
Differences Between the SME and RDEC Schemes
While
both schemes are different, they are the same regarding what qualifies as an
R&D project.
The definition of what R&D activities qualify is the same, regardless of
which scheme you are looking to claim.
Besides
different relief rates available, each scheme has different qualifying costs.
Under
the SME R&D tax relief scheme, you can include up to 65% of subcontractor
cost, so long as the subcontractor performed the work within the UK. In
contrast, the RDEC has strict restrictions on what subcontractor costs you can
include in your claim. You may include charity or scientific research organisation
costs, but not other subcontractor costs.
One
of the main advantages of RDEC is that your business can still qualify for tax
relief even if you receive government funding for the project. However, SMEs
claiming under the R&D Tax Credit scheme can’t claim if they’ve received
government funding.
We hope this guide helps you identify which scheme your business
qualifies for, but if you are unsure about any step of the R&D tax credit
claiming process, don’t hesitate to get in touch. Our
experts can guide and assist you on
every step of the process, from identifying if your project qualifies to
submitting the claim to HMRC on your behalf.
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Created on Feb 5th 2022 11:29. Viewed 178 times.