SME R&D Tax Relief: All You Need To Know

SME R&D Tax Relief: All You Need To Know

Research and Development (R&D) relief is for companies that work on innovative projects within science and technology. It can be claimed by a range of companies that seek to research or develop an advance in their field. To qualify for R&D relief, the project does not need to be successful.

What is SME R&D Tax Relief?

The SME R&D Tax Relief is a UK government incentive designed to encourage innovation and global competitiveness by providing a range of tax reliefs for research and development (R&D) expenses.

This scheme allows small and medium-sized enterprises (SMEs) to deduct an extra 130% of their qualifying costs from their yearly profit, in addition to the normal 100% deduction, to make a total 230% deduction. Furthermore, SMEs can also claim a tax credit if the company is loss-making, worth up to 14.5% of the recoverable loss.

The SME R&D Tax Relief is applicable to companies that have less than 500 staff and a turnover of under £100m or a balance sheet total under £86m. To qualify for the relief, the R&D projects must seek to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of scientific or technological uncertainty.

This scheme is highly beneficial for SMEs as it significantly reduces their tax bill or, for loss-making companies, provides them with a valuable cash credit to invest back into their business. It’s a fantastic way for the UK government to support SMEs in their innovative endeavours and help them drive forward their R&D activities.

What R&D Relief Can Be SMEs Claim?

Small or medium-sized enterprise (SME) R&D tax relief allows companies to:

  • Deduct an extra 130% of their qualifying costs from their annual 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

How Does the R&D SME Scheme Work?

The R&D SME scheme works by providing tax relief on eligible R&D expenses incurred by small and medium-sized enterprises. Here’s a step-by-step guide on how it works:

1. Identify R&D Activities

The first step is to identify the activities that qualify as R&D. This includes projects that seek to achieve an advance in science or technology and involve the resolution of scientific or technological uncertainties.

2. Calculate R&D Expenditure

Once the R&D activities are identified, the next step is to calculate the expenditure associated with these activities. This can include costs such as staff salaries, subcontractor costs, materials, utilities, software, and capital expenditure.

3. Claim Tax Relief

After calculating the R&D expenditure, the company can claim tax relief on these costs. For profit-making companies, they can reduce their corporation tax bill by up to 24.7% of the qualifying R&D expenditure. For loss-making companies, they can claim a cash credit from HMRC worth up to 33.35% of the qualifying R&D expenditure.

4. Submit R&D Tax Credit Claim

The final step is to submit the R&D tax credit claim to HMRC as part of the company’s Corporation Tax return. This includes a detailed R&D report explaining the nature of the R&D activities and a breakdown of the costs involved.

The R&D SME scheme is a self-assessment process, meaning it’s the responsibility of the company to identify qualifying R&D activities and calculate the associated expenditure. We can provide professional advice to ensure the claim is maximised and correctly submitted. The scheme is a fantastic way for SMEs to reduce their tax bill and reinvest the savings back into further R&D and business growth.

How to Qualify for SME R&D Tax Credit 

  1. You are SME, that is:
  • less than 500 staff
  • turnover of under 100 million euros or a balance sheet total under 86 million euros

(You may need to include linked companies/investments and partnerships when you work out if you’re a SME)

  1. Meet the government’s definition for R&D relief:

To qualify for R&D relief, you will need to cover how your project:

  • looked for an advance in science and technology
  • could not be easily worked out by a professional in the field
  • had to overcome uncertainty
  • tried to overcome this uncertainty

You can claim R&D relief if you research or develop new processes, products or services or improve on an existing one.

What R&D Costs Can SMEs Claim?

You can claim certain costs on the project from the date you start working on it until you develop or discover the advance, or the project is stopped.

  • Software (i.e. software licence fees)
  • Consumable items (i.e. materials, utilities and clinical trial volunteers)
  • Employee costs (i.e. salaries, Class 1 NIC and pension fund contributions)
  • Subcontractor costs (the amount that can be claimed for Subcontractor costs is restricted to 65%)

What R&D Costs are Exempt?

You cannot claim R&D tax relief for:

  • The cost of patents and trademarks
  • Rent or rates
  • The production and distribution of goods and services
  • Capital expenditure
  • The cost of land

How Q Accountants Can Help With Your R&D Tax Relief Claim

If you would like to know more information about R&D Tax Relief for SMEs and whether you qualify, please contact a member of our team who will be happy to assist.

Here at Q Accountants, we provide and cover a spectrum of tax services, including R&D Tax services which is led by our very own R&D Tax Specialist who will assist you throughout the claim process.

R&D SME FAQs

  1. Who qualifies for R&D tax relief?

    Small and medium-sized enterprises (SMEs) that are carrying out qualifying R&D activities. This includes projects that seek to achieve an advance in science or technology and involve the resolution of scientific or technological uncertainties.

  2. Is SME R&D tax credit taxable?

    No, the SME R&D tax credit is not considered taxable income. It’s a relief that reduces the company’s tax liability or, for loss-making companies, provides a cash credit.

  3. What is the percentage of SME R&D tax credit?

    SMEs can deduct an extra 130% of their qualifying costs from their yearly profit, in addition to the normal 100% deduction, to make a total 230% deduction. For loss-making companies, they can claim a tax credit worth up to 14.5% of the surrenderable loss.

  4. Can you write off R&D expenses on taxes?

    Yes, R&D expenses can be written off on taxes. This includes costs such as staff salaries, subcontractor costs, materials, utilities, software, and capital expenditure associated with qualifying R&D activities.