Your status for research and development (R&D) tax credit purposes can change as your staff headcount, turnover, and gross assets fluctuate. This determines whether you fall into the SME R&D tax credit scheme or the research and development expenditure credit (RDEC) scheme.
As the SME R&D tax credit scheme is more generous than the RDEC scheme, most companies will want to apply for R&D tax credits under the SME scheme where possible.
How do you know if you are an SME or not? For further information, read our KnowledgeBank article about what counts as an SME for the purposes of R&D tax credits.
What happens when my business crosses these thresholds?
Businesses are always evolving. Some SMEs will eventually outgrow these limits. Conversely, a large company may find itself falling below them: it may, for example, reduce the size of its workforce, or become independent from a group of companies.
These changes will not affect your company’s status until the conditions are met for two consecutive years. This is known as the ‘year of grace’. It means that in the period in which the thresholds are first crossed, you retain your existing status.
There is an exception to this rule: if an SME is acquired by a large company or group, then the year-of-grace provision is suspended. The SME becomes a large company in the period of acquisition. This applies for the whole period, not just from the date of acquisition.
This is an especially important consideration in sectors with high merger and acquisition activity.
What are the effects of changing status?
Changing status from an SME to a large company or vice-versa will change the overall R&D tax credit benefit you receive. The R&D tax credit rate differs between the SME R&D tax credit scheme and the RDEC scheme. If you change from SME to a large company, your R&D tax credit will reduce from (up to) 33p for every £1 spent on R&D activity, to 10p for every £1 spent under RDEC.
There are also other differences between the two schemes, including the types of expenditure you are allowed to include in your claim, as well as the mechanism for relief.
SMEs can use the RDEC scheme too
There are occasions when a company that would otherwise qualify for the SME scheme must make a claim under the RDEC scheme for all, or part, of its R&D expenditure. This can occur where you have received certain types of grant funding or you carry out R&D as a subcontractor.
To ensure your R&D work is properly claimed for, and the benefit of your R&D tax credit is maximised, expert advice is recommended. At ForrestBrown, our team of chartered tax advisers, sector specialists, lawyers and former HMRC inspectors will ensure that your claim is made correctly and its value is optimised.