For the purpose of R & D tax credits, what is an SME?
Your business should have under Five hundred workers to be considered as an SME for research and development (R & D) tax credit reasons, and:
• Lower than €86 million gross assets
• Lower than €100 million turnover
You'll be viewed as a large company and not a small to medium enterprise should you surpass the gross asset and turnover cap.
Why are the figures in Euro rather than GBP?
In a nutshell, it is because the E.U. Commission first set the meaning of a small to medium enterprise. Basically change your numbers into Euros. Task finished.
Keep in mind, R & D tax credits aren't dependent on funding from the Eu in any way, regardless of the initial meaning of a small to medium enterprise coming from the European Union.
How can I be certain what R & D structure to make use of?
For the purpose of an R & D tax credit claim, it's crucial to determine whether you're a small to medium enterprise or viewed as being a large organization in line with the description above.
• Research and Development Expenditure Credit (RDEC) is worth 10p back for each pound used on qualifying R & D actions.
• For every pound invested in qualifying projects, you can retrieve 33p from every pound underneath the small to medium enterprise R & D tax credit incentive.
This short article describes a number of variables that can impact your claim and also the incentive you utilize, irrespective of your quantity of staff, balance sheet and assets.
We also cover the best way to figure out where your business stands when it comes to being a smaller or larger business.
How can you figure out if your business suits the small to medium enterprise classification?
For the avoidance of uncertainty, let’s be clear. Whenever establishing your status for R & D tax credits it's important to record the amount of staff, gross assets and balance sheet.
Let’s look into this in more detail:
It may sound clear, but what is meant by ‘500 staff?’
It’s important to burrow into your precise volume of employees on your pay-roll and this certainly does include your company directors.
For those who have seasonal employees, casual staff or perhaps part-time employees you change them into annual worker units. E.g. somebody working a three-day week will be changed into 0.6 of a unit.
You have to include all staff, considered staff and any secondees. Sub-contractors aren't included. Remember with R & D, there will always be ‘shades of grey’ and listed here are three exceptions to be conscious of:
• Students on vocational training inside your business,
• Time away for Maternity/Paternity leave,
• Apprentices on apprenticeship agreements.
How would you establish the €86 million balance sheet amounts along with the €100 million turnover limit?
Through taking a look at your business's annual turnover amount released in your yearly accounts you are able to establish if your turnover is inside the turnover cap.
Indirect taxes and Value Added Tax (VAT) can be excluded. Whenever your company accounts are for a period of time either longer or shorter than twelve months, it is important to annualise the amounts for a full 12m time period.
By evaluating your gross assets as released in your annual accounts, you are able to identify the real balance sheet total. When these amounts might be considered ‘unfair,’ HMRC have the flexibility to take into account your position on their own merit.
Keep in mind connected businesses.
A particular term for tax purposes is a connected enterprise. It's a way to discover if your company is part of a bigger group of companies or if you’re considered a self-serving, stand-alone company.
Based on the kind of business and whether it's a connected business or not will have an impact on an R & D tax credit claim.
So, even though in theory you may initially seem to be a small to medium enterprise, there are more key elements which are essential to think about.
You definitely don't want to submit the wrong grounds for a claim as HMRC will be within their legal rights to come after you, most likely with fees and penalties and interest as is often the situation.
HMRC is now chasing after £612m in R & D tax relief repayments for improper claims, which illustrates the necessity of utilizing a specialist to securely enhance your award.
Should there be any companies that your business manages or others that manage your own or that are managed by the same person, then these businesses are linked.
For the purpose of tax, control is reasoned by means of meeting any one of these three tests:
• Having the ability to alter the majority of the senior management staff,
• Being in a position to apply a dominant influence over the linked business,
• Owning more than 50% of the voting rights.
In this instance, the balance sheet assets and turnover information combined with the complete headcount is grouped before considering whether or not the small to medium enterprise thresholds have been attained.
It is not only companies you have to bear in mind for aggregation. Additional enterprises, for example, partnerships and trusts, should be included.
Keep-in-mind that it's not merely other business's info you need to group. Trusts and partnerships are other entities that need to be integrated within your cluster profile.
Does any other business keep between 25% and 50% of the capital or voting privileges of your business? Or, do you hold between 25% and 50% of their capital or voting privileges.
These connections are classified as partner enterprises. An amount of their turnover, balance sheet assets and worker figures are required to be grouped with yours. These numbers are grouped based on the percentage holding.
VCs, Universities and institutional investors and a few other organisations that would otherwise be recorded as partner enterprises are omitted from this procedure.
At what time will your business switch between the large company and small to medium enterprise statuses?
• For the purpose of an R & D tax credit claim, your business's position will only change after the requirements for each incentive has been consistently met for a two-year time period.
Your company's gross assets, turnover and volume of normally fluctuate with time. It’s completely possible that your company might dip into and out of both the larger and SME status at various times.
As the small to medium enterprise scheme is more advantageous compared to the RDEC incentive, most companies may wish to claim R & D tax credits under the SME incentive whenever possible, because it is much more beneficial to do so.
Other things to take into account prior to making an R & D tax credit claim When you're sure that you are entitled to be listed as a small company for tax credit reasons, then you'll want to proceed with a claim through the SME R & D tax credit incentive.
Seems easy right? Not so much!
Well, remember with tax credit incentives, there are some issues that could restrict your SME position for research & development tax credit claims.
Call us for an R & D tax credit claim eligibility health check.
Now that you know if your business is considered a larger company or an SME for the purpose of an R & D tax credit claim, the next question will probably be: just how much is my business going to get back?
To go over any of your business's historical projects and to learn if your company activity is eligible for an R & D tax credit claim, call us.
We will also be pleased to offer an indication of roughly what you may have the ability to claim.
Get in contact on 01617911401 and one of our team of experts will be happy to assist you to.
Chris is our client relationship manager. He loves helping our clients with technical aspects of their R&D projects and is happy to help.