Small and Medium Enterprise (SME) Scheme Explained

The SME scheme is available for Small and Medium-sized enterprise, who are conducting Research and Development at their own financial risk. That generally means to develop or significantly enhance their own processes, materials, devices products or services. However, it does also extend to work that the company enters into through a tender process, or where a fixed price contract is agreed with a customer for the delivery of a completed piece of work, where R&D is required.

The only area of concern would be if a significant payment is received up front, generally >50%, in which case there is an argument that the project has been subsidised!

What makes a business an SME?

To qualify as a Small and Medium-sized entity, the business and any connected businesses (subsidiaries and parents) must:

• Employ less than 500 Full-time equivalent staff; and
• Have either:
  • Turnover below €100m; or
  • Gross Assets on the balance sheet below €86m

So in essence a small or medium-sized entity can be pretty big!

If you don’t meet the criteria to qualify as an SME or you’ve received a grant or subsidy or you’ve been subcontracted to by a large or international company or an individual or partnership, you’ll be able to claim RDEC.

An SME can claim for all of the costs that qualify apart from Contributions to Independent Research, these can only be claimed under RDEC.

How to calculate the SME Scheme?

Under the SME scheme you are able to include all of the eligible costs, staff costs, materials consumed, utilities, software, payments to clinical trials volunteers at 100% of the relevant apportionment of time spent on R&D. You will also be able to claim 65% of the relevant time spent on R&D for subcontractors and externally provided workers engaged on the project.

Once you have calculated this pot of eligible costs, the tax relief allows for an additional deduction of 130% (to 1 April 2023 and then 86% after) of this pot of costs from your profits chargeable to corporation tax. If after this deduction you still have a profit then you will have made a tax saving equivalent to 24.7% of the pot of costs (after 1 April 2023, the tax saving will be equivalent to 21.5%). If however you had a significant loss before the additional deduction, you can choose to surrender that loss for a payable tax credit.

The amount of loss that you can surrender is capped at the lower of the total R&D spend (pot of costs plus additional deduction) or the loss created after the additional deduction. If you chose to surrender the loss, then you could receive a payable tax credit equivalent to 33.35% of your eligible spend (reduced to 18.6% from 1 April 2023)

Learn more

If you are interested in learning more about SME tax relief and whether you can make a claim, please get in contact with the team at Cooden Tax Consulting today. We have years of experience working with businesses of all sizes and helping them to claim tax relief on their R&D work.

We would be happy to work with you to help you maximise your R&D tax credit claim, providing helpful advice and guidance throughout.