When it comes to R&D tax claims, being aware of the size category your company falls under is vitally important.
Many UK companies may want to appear bigger than they are, in the hope it attracts more business. However, when it comes to R&D tax claims, it is quite the opposite.
Your company size can greatly affect the amount you can claim via R&D tax credits. It can be quite complicated too, if you do not know what to look out for, and HMRC can potentially penalise you if you get it wrong on the application.
To ensure this doesn’t happen, our experts have outlined a few key factors in relation to company size to think about when applying for R&D tax credits.
What are the two types of R&D tax available?
Before delving into detail about what HMRC looks for when assessing the size of a company, it is worth noting why size matters.
There are two categories of R&D tax credits available. The Small and Medium Enterprise (SME) relief, and the large company relief, also known as the Research and Development Expenditure Credit (RDEC). Let’s look at the SME relief first.
This is the more generous of the two categories. R&D tax credits are calculated based on the company’s research and development spend. To make an R&D credit calculation, you need to identify qualifying expenditure and enhance it by the relevant rate.
The SME R&D tax relief allows companies who qualify to:
- deduct an extra 130% of their qualifying expenditure from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction
- claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss
As of January 2019, SMEs are able to claim up to 33p for every £1 spent on qualifying R&D activities. This is potentially a huge amount for many SMEs, highlighted by the fact that the average SME tax credit claim is approximately £62,000. This is not an amount to be ignored in today’s current financial climate.
Large Company Relief – RDEC
If you are large company, the relief is a little less generous. The RDEC rate is 12%, however, because the RDEC rate is paid net of Corporation Tax, the effective rate your large company can receive is worth 10p for every £1 spent.
Similar to the SME relief, the credit is offset against the company’s tax liability or, in some circumstances, is payable in cash.
According to the latest Government statistics, the average value of large company R&D tax credit claim was approximately £343,000.
To sum up the two categories, we have noted down the figures in a table below.
What is the definition of an SME in relation to R&D tax?
The Government has set clear guidelines in relation to which companies qualify for which category. However, these guidelines can become confusing if all factors are not considered.
HMRC define a large company as either having:
- More than 500 employees
- An annual turnover of €100 million or;
- A balance sheet total under €86m
There are a few factors to bear in mind here, however. The 500 employees, for example, are classed as FTE (full-time equivalent). This means that there are two types of employees that do not contribute to the total count:
- Employees on maternity or paternity leave
With the increase of apprenticeships over the last 15 years, it is worth noting this down as they could make up a significant part of your workforce, and this could have an impact on the amount of R&D tax relief you can claim.
How do linked companies interact with R&D tax?
In addition to keeping an eye for the count of employees, it is also vitally important companies keep in mind any linked or partner companies. If your company has external investors, or is in a group, it is worth checking with an R&D tax expert whether it could affect your SME status.
If, for example, your company has more than 50% of the shareholders’ or members’ voting rights in another company, the data of that company needs to be added to the data from the company putting in the R&D tax claim.
In addition to this, if 25% of the company is owned by another entity, or if the company in question owns 25% of another, it is classed as a partner company which can also complicate matters.
We often see SMEs fall foul of this particular aspect of R&D tax credits. If you are unsure about your status, our advice would be to double check with an expert before putting in a claim.
Is my company qualifying for R&D tax credits?
Once you’ve worked out which category you fall under, you will need to investigate if the work you are doing actually falls under the required qualifying activity criteria.
The government has set out some guidelines to help companies. These are:
- Creating new products, processes or services.
- Changing or modifying an existing product, process or service.
- Activities aimed at obtaining new knowledge.
- The search for alternatives for materials, devices, products, processes, systems or services.
If your business is undertaking R&D activity in relation to a specific project (even if the project is unsuccessful in the end) and the R&D activity meets the above definition of qualifying R&D, then you could be eligible for this additional tax relief.
We often come across many companies who carry out eligible R&D activities without realising that their work qualifies for this little known tax relief.
How can RDTaxCredit.org.uk help?
RDTaxCredit.org.uk understand that the process of claiming R&D tax credits can be a little complicated. That’s why we have industry experts who can guide you through the process, step-by-step, to ensure that you can claim as much tax relief as you possibly can.
We can determine whether you are an SME or large company under the government’s rules, and ensure that there are no problems or mistakes with the application.
Our experts help companies across all sectors with claiming R&D relief, leaving them with more cash to re-invest into their business. We have of experience in dealing with many SMEs and large companies across the UK.
We handle the R&D claim from start to finish and can produce the technical report on your behalf that helps R&D Tax inspectors understand your work and approve the claim more efficiently.
We offer a friendly and professional approach to R&D tax credits which includes:
- A free no obligation initial review.
- 100% success rate
- 30 day quick turnaround
If you would like to contact one of our experts for free initial advice, complete the quick enquiry form to receive a no-obligation review of your R&D Tax Relief claim.