Key differences between the SME and RDEC schemes?

Sam Palmer
Research and Development
Sam Palmer, Tax adviser for Lovewell Blake

The Research and Development (R&D) tax relief schemes can provide valuable reliefs and tax credits to innovative companies. The two schemes are the Research and Development Expenditure Credit (RDEC) scheme, and the Small and Medium Enterprise (SME) scheme, with differing levels and methods of reliefs. It is important to know which of these schemes your company falls into when making a claim but making that determination can often be complex.

Sam Palmer, Tax adviser for Lovewell Blake

The differences – reliefs

While both schemes are very valuable, there are key differences in the levels and types of reliefs provided.

The SME scheme:

  • The SME scheme provides smaller businesses with an additional tax reducer of 130% on top of the standard 100% deduction for allowable expenditure, meaning £100 of qualifying expenditure results in a £230 deduction from profits.
  • Where this deduction results in or increases a loss, an SME company has the opportunity to surrender that loss for a payable tax credit worth 14.5% of the loss surrendered.

The RDEC scheme:

The RDEC scheme offers larger companies a 13% tax credit on their qualifying expenditure.

  • In simple terms, £100 of qualifying expenditure results in a £13 tax credit, however, HMRC will apply corporation tax to this resulting in the company receiving slightly less than this.
  • If the company is profit making, this credit must be offset against the company’s tax liability.
  • Where the company is loss making, the credit is payable to the company.

The differences – requirements

In order to qualify for the R&D Tax Relief under the SME scheme, the company must meet the following criteria as defined by HMRC:

  • Less than 500 employees, and
  • Turnover lower than €100,000,000; or
  • A balance sheet value less than €86,000,000

These figures may be aggregated with other connected or partner enterprises.

A company which exceeds these thresholds will fall under the RDEC scheme.

An SME may fall into the RDEC scheme as a result of grant funding or acting as a subcontractor.

Other key points:

It is also important to note that under both schemes the credits provided are capped by the qualifying expenditure on PAYE and national insurance contributions.

HMRC will seek to offset the credit given against any other liabilities owed to them, before paying out to the company.

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