What is the SME scheme?
Companies that incur costs related to research and development (R&D) activities, and that meet the qualifying criteria to be considered eligible for the ‘Small and Medium Enterprise’ (SME) Scheme, may claim an enhanced tax deduction. This deduction can be used to reduce the company’s tax liability or in some cases, surrendered for a payable tax credit.
If you would like to discuss any of the matters raised, please get in contact with one of our R&D specialists.
What level is available?
Under the SME Scheme, the benefit is delivered as an enhanced tax deduction. The benefit of which will appear in your financial statements ‘below the line’ (profit before tax).
Rates of benefit depend on the tax profile of your company, as follows:
|Pre April 23||Post April 23|
|SME tax credit rate||14.5%||10%|
|Tax paying entity (per £1 spend)||24.7p||21.5p|
|Loss-making entity (per £1 spend)||33.35p||18.6p|
|RDEC gross credit||13%||20%|
|Net of tax benefit per £1 spend||10.53p||15p|
How do I claim tax relief?
- Most businesses that have a tax agent will submit corporation tax returns using tax software, and an R&D claim should be included within this, either in your original submission, or an amended return within the time window for making amended claims.
- If you are not represented by an agent or adviser, you can claim the credit via HMRC online by entering your expenditure into a full Company Tax Return form (CT600), submitting separate claims for each accounting period.
- With either option, you will also have the facility to submit evidence to support your claim in the form of a technical report explaining how the company’s activities meet the eligibility criteria, and also an analysis of the financial calculation. This is strongly recommended to speed up the process.
- In advance of submitting the claim within your CT600, you will also need to submit an ‘Additional Information Form’ (AIF) via the Government Gateway portal. This form provides additional supplementary information to HMRC to help them to assess your claims.
What qualifies as R&D expense
Once you have identified eligible activities, you will need to assess which expenditure items qualify for the R&D claim. The following areas apply:
- staff costs: salaries, bonuses, employer’s NIC and pension fund contributions and some reimbursed business expenditure;
- externally provided workers: for example, workers used to augment the company’s headcount, engaged to work under the company’s direction, through a staffing agency or personal service company;
- expenditure on software licenses used to deliver the R&D project;
- consumable items such as materials and utilities (heat, light, power and water); and
- subcontracted costs.
What evidence do I need?
The R&D incentive schemes are particularly generous regimes, and HMRC rightly pay close attention to ensuring that these incentives are correctly focussed towards eligible businesses. As such, claims should be supported by documentation that:
- articulates the activities within the business that meet the qualifying criteria, referencing the BEIS Guidelines (2004);
- sets out the methodology for preparing the claim; and
- analyses the eligible costs, disclosing how these have been calculated.
Where RSM assists you in making a claim, we would typically recommend a self-standing report with financial appendices that provides all this information.
By going through these steps, you will help HMRC process the claim faster, and minimise the risk of further enquiries, or extending the period for which an enquiry can be raised (through discovery assessments where insufficient information is initially provided), bringing you earlier certainty over the outcome of your claim.
How will I receive my credit?
How you receive your credit will depend on the tax profile of your company.
- For loss making businesses, the enhanced tax deduction may be surrendered for a payable tax credit (subject to the company having paid sufficient PAYE and NIC in the period).
- For profitable businesses, the enhanced tax deduction will be offset against taxable profits in the period, serving to reduce the company’s tax liability, or decelerate the use of brought forward tax losses.
‘Proposed future scheme’
The Government is consulting on the introduction of a combined ‘single scheme’ which could be introduced from as early as April 2024. Proposed design principles include:
- a single scheme that operates in a broadly similar manner to the current RDEC scheme; and
- a taxable credit of 20% available, providing an after tax benefit (applying the current 25% rate of corporation tax) of 15%.
This scheme would be applicable for all businesses, with the exception of loss making ‘R&D intensive’ SMEs, for which a supplementary regime would be retained (effective from 1 April 2023) operating on the following principles:
- relevant to loss making SME businesses, for whom at least 40% of their total expenditure will be qualifying R&D expenditure;
- scheme will continue to operate on the existing principles of the SME scheme; and
- eligible R&D expenditure can be surrendered for a payable tax credit of 14.5%, providing a net tax credit of approximately 27%