Introduced in 2000, the R&D Tax Relief Scheme for SMEs is the main source of state support in the UK for innovative companies, and aims to encourage their efforts in developing and improving new products and services.
It consists of an R&D tax relief incentive for SMEs that allows enhanced deduction of 230% of eligible R&D expenditure from a company’s taxable income – providing an effective cost reduction of 26% after applying the corporate tax rate.
If the company is loss-making it can choose between carrying the losses generated forward to offset against a future tax liability, or surrendering the losses for a payable tax credit at a rate of 14.5% (as of 1 April 2015). This could mean the company receives a cash credit equivalent to 33.35% of what it spent carrying out R&D.
Who can benefit from the incentive?
The definition of an SME for R&D tax relief purposes is the standard European Commission definition of an SME, but with doubled thresholds, i.e.:
- Less than 500 employees.
- Either: annual turnover < €100 million OR total balance sheet < €86 million.
- All entities within a group are included when calculating the threshold.
The R&D tax relief for SMEs is available to any incorporated company conducting innovation, regardless of its sector of activity.
R&D Tax Relief Guidelines
Creation or improvement of a product, procedure, process, program or equipment, demonstrating originality or substantial improvement
Claims are made through a self-assessment method in the corporate tax return. Technical and financial documentations to support the claim is necessary in the event of enquiries from HMRC.
- Staffing costs
- Operating costs (software and consumables)
- Subcontracted activity
Chargeable profit reduced by 130% of R&D expenditure (100% being automatically chargeable) to allow an enhanced deduction of 230%.
The benefit is equivalent to 26% of R&D expenditure: 130% x CT rate 20%