What is a Small to Medium Sized Enterprise (SME) for R&D tax credit purposes?
Your company must have less than 500 employees to be classed as an SME for research and development (R&D) tax credit purposes, and:
•Less than €86 million gross assets
•Less than €100 million turnover
You will be classed as a large company and not an SME if you exceed the gross asset and turnover limit.
So why are the numbers in Euro’s and not pounds?
In short, this is because the European Commission first set the definition of an SME. Simply convert your figures into Euros. Job done.
Bear in mind, R&D tax credits are not reliant on funding from the European Union in anyway, despite the original definition of an SME originating from Europe.
How can I be sure what R&D scheme to use?
For the purposes of an R&D tax credit claim, it is key to identify whether you are an SME or classed as a large company based on the definition above.
•Research and Development Expenditure Credit (RDEC) is worth 10p back for every pound spent on qualifying R&D activities.
•For every pound spent on qualifying activities you can recover 33p from every pound under the SME R&D tax credit scheme.
This article explains several additional factors that can affect your claim and the scheme you use. Regardless of your number of employees, balance sheet and assets. We also cover how you can work out where your company stands in terms of being a smaller or larger company.
How do you understand if your company fits the SME definition?
For the avoidance of doubt, let’s be crystal clear. When establishing your status for R&D tax credits it is important list the number of employees, gross assets and balance sheet.
Let’s investigate this more closely:
It sounds obvious, but what is meant by ‘500 employees?’
It’s imperative to drill down into the exact number of staff on your payroll and this absolutely does include your directors. If you have seasonal workers, casual staff or even part-time staff you convert them into annual worker units. E.g. someone working a three-day week would be converted to 0.6 of a unit.
You must include all employees, deemed employees and any secondees. Subcontractors are not included. As always with R&D, there are always ‘shades of grey’ and here are three exclusions to be mindful of:
•Time off for Maternity/Paternity leave,
•Students on vocational training within your workplace,
•Apprentices on apprenticeship contracts.
How do you work-out the €86 million balance sheet figures and the €100 million turnover cap?
By looking at your company’s annual turnover figure published in your annual accounts you can establish if your turnover is within the turnover limit. Indirect taxes and Value Added Tax (VAT) can be excluded. When your accounts are for a period s either shorter or longer than 12 months, you must annualise the figures for a full 12m period.
By looking at your gross assets as published in your annual accounts, you can establish the true balance sheet total. When these figures could be deemed ‘unfair,’ HMRC have the flexibility to consider your circumstances on their own merit.
Be mindful of connected enterprises.
A specific term for tax purposes is a connected enterprise. This is a way to understand if your business is part of a larger group of companies or if you’re deemed a self-serving, stand-alone business.
Depending on the type of business and whether it is a connected enterprise or not will have a bearing on an R&D tax credit claim. So, although on paper you might initially appear to be an SME, there are other important factors that are important to consider.
You certainly would not want to submit an incorrect basis for a claim as HMRC would be within their rights to come after you, likely with penalties and interest as is often the case.
HMRC is currently chasing £612m in R&D tax relief repayments for incorrect claims, and this highlights the importance of using a specialist to safely optimise your award.
If there are any that your company controls, or others that control yours or that are controlled by the same individual, then these companies are linked. For the purposes of tax, control is reasoned by meeting any one of these three tests:
•Having the power to change most of the senior management team,
•Being able to exert a dominant influence over the linked company,
•Owning more than 50% of the voting rights.
In this case, the balance sheet assets and turnover data along with the total headcount is clustered before considering whether the SME thresholds have been reached.
It is not just companies you need to consider for aggregation. Other enterprises, such as partnerships and trusts, must be included.
Bear-in-mind that it is not just other companies’ data that you need to cluster. Trusts and partnerships are other entities that must be included in your cluster profile.
Does any other company hold between 25% and 50% of the capital or voting rights of your company? Or do you hold between 25% and 50% of their capital or voting rights.
These relationships are known as partner enterprises. A proportion of their turnover, balance sheet assets and employee numbers must be clustered with yours. These numbers are clustered according to the percentage holding.
VCs, Universities and institutional investors and some other organisations that would otherwise be written down as partner enterprises are excluded from this rule.
When does your company change between the large company and SME statuses?
•For the purposes of an R&D tax credit claim, your company status will only change after the criteria for each scheme has been consistently met for a two-year period.
Your business’s gross assets, turnover and number of employees naturally fluctuate over time. It’s entirely plausible that your business could dip in and out of both the larger and SME status at different times.
As the SME incentive is more generous than the RDEC scheme, most businesses will want to claim R&D tax credits under the SME scheme when possible, as it is more advantageous to do so.
Other things to consider before making an R&D tax credit claim
When you are certain that you are eligible to be listed as a small business for tax credit purposes, then you will want to move forward with a claim via the SME R&D tax credit scheme.
Sounds straight forward right?
Well, as always with tax credit incentives, there are a few things that could limit your SME status for research and development tax credit claims.
Contact us for an R&D tax credit claim eligibility health check
Now that you understand if your company is deemed a larger company or an SME for the purposes of an R&D tax credit claim, your next question will more than likely be: how much is my company going to get back?
To discuss any of your company’s historic projects and to learn if your business activity qualifies for an R&D tax credit claim, contact us. We will also be happy to provide an indication of roughly what you may be able to claim.