To be classed as an SME for research and development (R&D) tax credit purposes you must have fewer than 500 staff, and either:
A turnover of no more than €100 million; or
Gross assets of no more than €86 million.
If your staff headcount is lower than 500, but you exceed both the turnover and gross asset thresholds, you will be classed as a large company for R&D tax credit purposes.
Why are the figures in Euros?
It’s because the SME definition was written by the European Commission. All you need to do is convert your sterling values into Euros. It’s that simple.
It’s also important to note that, although the SME definition originates from the European Commission; R&D tax credits are not reliant on EU funding in any way.
What R&D tax credit scheme do I use?
For accounting periods beginning on or after 1 April 2024, SMEs fall into one of two schemes: the R&D merged scheme for non-intensive SMEs and the enhanced rate for R&D intensive loss-making SMEs (ERIS).
- Merged scheme – an SME with less than 30% of total expenditure on qualifying R&D
- ERIS – an R&D INTENSIVE SME with more than 30% of total expenditure on qualifying R&D
What is the definition of an SME?
It is important to keep the definition of what counts as an SME for the purposes of R&D tax credits in mind. This is because it is the main factor that determines whether you claim using the merged scheme, or if you are eligible for the enhanced rate for loss making SMEs. For claim periods before April 2024, it will also determine whether you claim using the SME or RDEC scheme:
- The SME R&D tax credit scheme is worth up to 27p for every pound spent on qualifying expenditure between 1 April 2023 and 31 March 2024. This effective benefit of 27% applies to R&D Intensive SMEs whose qualifying R&D expenditure constitutes at least 40% of their total expenditure. Other SME companies get a lower benefit.
- RDEC, the Research and Development Expenditure Credit, is worth 15p for every pound spent on qualifying expenditure, with a rate of 20% for expenditure between 1 April 2023 and 31 March 2024.
For accounting periods from 1 April 2024 onwards, SMEs will claim under the merged scheme unless they qualify for the enhanced rate for R&D intensive loss-making SMEs. If you spend 30% or more of your overall expenditure on R&D, and are considered loss-making for tax purposes, then this qualifies your business for this enhanced rate. Find out more information about the enhanced rate for R&D intensive loss-making SMEs
This article tells you how to assess your company against the definition, so you can work out where you stand. It also highlights a few other factors that can affect which scheme you can use – regardless of your headcount, turnover or balance sheet assets.
How do you assess yourself against the criteria for SME status?
In determining your status for R&D tax credits, you need to examine your staff headcount plus turnover and balance sheet gross assets. Let’s look at these in more detail.
What is meant by ‘500 staff’?
To calculate your staff levels, you need to consider employees on your payroll, including the directors. If you have part-time staff, or seasonal workers, you can convert their time into annual work units. For example, someone working four days a week would count as 0.8 of a unit.
Subcontractors are not counted; however you do need to include secondees and any deemed employees if relevant. There are three notable exclusions:
- Students engaged on vocational training,
- Apprentices on apprenticeship contracts,
- Maternity and paternity leave.
How do you establish the €100 million turnover and €86 million balance sheet figures?
To check your turnover meets the SME thresholds, you would typically use the annual turnover figure from your published accounts. VAT and indirect taxes can be excluded. If your accounts are for a period of shorter or longer than 12 months, you must annualise the figures.
For the balance sheet total, you should look at the gross assets in your published annual accounts. HMRC do have the flexibility to consider your circumstances if the accounts yield an unfair result.
Watch out for connected enterprises
A connected enterprise is a specific term for tax purposes. It relates to whether you are in some way part of a larger group or are considered an autonomous entity. It is the nature of any connection that is relevant to an R&D tax credit claim. Specifically, are you a linked enterprise or a partner enterprise? Answering this may affect whether you are an SME – even if at first glance you appear to definitely be one.
Partner enterprises
You need to consider whether any other enterprises hold between 25% and 50% of the capital or voting rights of your company. Or if there are any enterprises in which you hold between 25% and 50% of their capital or voting rights. These enterprises are known as partner enterprises. A proportion of their headcount, turnover and balance sheet assets must be aggregated with yours. The figures are aggregated according to the percentage holding.
Some enterprises that would otherwise be counted as partner enterprises are excluded from this rule. These include universities, VCs and institutional investors among some other organisations.
Linked enterprises
If there are any enterprises which control your company, or that your company controls, or that are controlled by the same person, these enterprises are linked. Control is defined by meeting any one of three tests:
- Owning more than 50% of the voting rights,
- Having the power to change the majority of the senior management team,
- Being able to exert a dominant influence over the company.
In this case, the total headcount, turnover and balance sheet assets data is aggregated before considering whether the SME thresholds have been met.
It is not just companies you need to consider for aggregation. Other enterprises, such as partnerships and trusts, must be included.
Other factors that impact how you make an R&D tax credit claim
If you are classed as an SME for R&D tax credit purposes, your next step will be to make a claim under either the merged scheme or the ERIS scheme. However, there are a few other factors that could come into play which effectively restrict your SME status for R&D tax credit claims.
Further detail on each is available in the following articles:
- What impact do grants and subsidies have on R&D tax credit claims?
- Does subcontracting affect my R&D tax credit claim?
- What if some of my business is abroad?
- What happens if I haven’t paid any NIC or PAYE?
How many SMEs claim R&D tax relief in the UK?
For the tax period 2021-22, HMRC estimates that 85,625 SMEs made R&D claims in the UK. This accounts for 95% of all claims during the same period. Not all SMEs claimed under the SME scheme however, with 6420 claiming under RDEC.
With the new merged R&D scheme in place, find out which scheme you should be claiming under for your R&D.
How do you change between SME and large company status?
The staff headcount, turnover, and gross assets of a business fluctuate over time. So, it is natural that you may find your business crossing the threshold between an SME and a large company – in either direction.To understand the effects of changing status, read our article on How to change status from SME to RDEC – or vice-versa.
Contact us for an R&D tax credit eligibility assessment
Now that you know whether you are classed as an SME or a large company for R&D tax credit purposes, it’s probable that your next question will be: how much is my claim likely to be worth? It’s also useful to understand the way R&D tax relief is treated in your accounts.
Find out more about the merged R&D scheme, and ERIS.