R&D tax relief for SMEs

There are two schemes for claiming R&D tax relief - the Small or Medium-sized Enterprise (SME) Scheme and the R&D Expenditure Credit (RDEC) Scheme for large companies.

The SME scheme offers more generous reliefs to qualifying companies. The amount of R&D tax relief available depends on the total qualifying spend on R&D activities. A company is defined as an SME if staff headcount is less than 500, and turnover is less than €100m or the balance sheet total is less than €86m. SMEs can claim R&D tax credits of 230% on qualifying expenditure or for loss making companies claim a tax credit worth up to 14.5% of the loss that can be surrendered. 

A new measure is expected to take effect for accounting periods beginning on or after 1 April 2021 that will limit the amount of payable R&D tax credit which a SME can claim to £20,000 plus 300% of its total Pay as you Earn and National Insurance Contributions liability for the period.

A company is exempt from the cap if:

• its employees are creating, preparing to create or managing Intellectual Property and
• it does not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to, or the provision of externally provided workers by, connected persons

The impact on the majority of affected businesses is expected to be negligible. The measures are aimed at those who seek to use the tax relief for fraud and abuse.