As you may know, there are two main R&D Tax Credit schemes. Whether the claiming company is eligible for the SME scheme or the RDEC, depends on its size.
The schemes differ not only in their requirements, but also in the benefits they provide. In fact, under SME R&D Tax Credits companies get back from HMRC up to 33p for each £1 of eligible R&D spend, while under RDEC, they can only claim back 10p for a pound of eligible R&D spend. We set up an R&D Claim Calculator for you to work out how much your R&D could be worth.
So we know that the defining factor is size. But how do we define size?
In order to qualify for the SME scheme (the most advantageous of the two), companies must fit the EU definition of a SME. This is determined by three conditions.
- The company must employ less than 500 full-time-equivalent members of staff, AND
- Not have a Turnover above €100m, OR
- Not have Gross Assets above €86m.
While the first condition is mandatory, only one out of the following two must be fulfilled in order to fit the definition, as outlined in the chart below.
Details of the definition
For most companies, it will be a quite straightforward process to assess whether they exceed or not the conditions to be considered an SME. However, there are some nuances in the definition that it’s worth outlining in more detail.
The threshold of 500 staff members is based on full-time employees. This means that employees working part-time or seasonally must not be considered as a whole unit. Instead, their working hours must be put in proportion with the annual working hours of a full-time employee, and based on that they will be worth a fraction of a unit in the employee count.
For example, an employee working 4 days a week would count as 0.8 of a unit, for the purposes of this definition.
While subcontractors shouldn’t be included in the count, temporary workers and substitutes should, except for students on vocational training, apprentices and workers on parental leave.
Figures for annual turnover and gross assets should be sourced from your latest published accounts. Remember that the figures in the definition are in euros (as of today they are equivalent to about £84.7m for turnover and £72.85m for gross assets).
If your accounts show revenues for a period different from 12 months, the figure should be annualised. VAT and indirect taxes can be excluded.
Possible exceptions to the rules outlined here can arise if you received any government grants. R&D Tax Credits and Grants can coexist, but there are restrictions when they are used at the same time.
The definition of SME for R&D tax purposes can be affected by a company’s connected enterprises, if there are any. These can be divided into two types.
Partner enterprises are companies that own between 25% or 50% of capital or voting rights in your company, or – viceversa – companies of which you own between 25% and 50% of capital or voting rights. The headcount, turnover and gross assets of partner enterprises should be all added together in order to determine whether a company meets the SME definition.
Entities such as VCs, universities and institutional investors are excluded from this rule.
Linked enterprises are companies that have control over each other, or that are controlled by the same person. Control over a company is defined by meeting one of the following three criteria:
- Owning over 50% of the voting rights;
- Being able to change the majority of the senior management team;
- Exerting a dominant influence over the company.
If the company making the claim turns out to be linked to another, their headcount, turnover and assets need to be aggregated before assessing whether they constitute an SME. This also includes entities that are excluded from the partner enterprises rule.