SME scheme: How to make an SME R&D claim

The SME R&D tax credits scheme is a UK government tax incentive that promotes innovation amongst small to medium-sized businesses. Find out how to claim.

The small to medium-sized enterprises (SME) R&D tax relief is commonly known as the SME R&D tax credits scheme or the SME R&D tax relief scheme. It is a UK government tax incentive that promotes innovation amongst the UK’s small to medium-sized businesses.

This guide will cover everything you need to know about the SME R&D tax relief scheme, including how it works, who is eligible, and how to apply for it.

What is SME R&D tax relief?

In 2000, the UK Labour Government started the R&D tax credit scheme to support innovation and growth for small to medium-sized UK businesses.

The government set up the SME scheme to offer small to medium-sized businesses who engage in R&D a reduction in their Corporation Tax and/or payable credit.

SME R&D tax relief is one of the two available schemes for accounting periods before April 2024. You can also claim through the RDEC scheme (Research and Development Expenditure Credit).

Who qualifies for SME R&D tax relief?

The most crucial factor determining whether your business qualifies for SME R&D tax credits is the size of your business.

HMRC has a set of criteria to determine whether you qualify as a small to medium-sized company

If your business has fewer than 500 staff and a turnover of under €100m or a balance sheet total under €86m, then you can likely claim through the SME Scheme. If your company exceeds those limits, then you should claim using the RDEC scheme. Note that the limits are in euros because the HMRC rules have been adapted from European-wide rules.

Exceptions that should apply for the RDEC Scheme:

There are three types of SMEs that must instead claim tax relief through the RDEC Scheme:

1. Subcontracting SMEs

If you were subcontracted to perform R&D for a larger company, you would have to claim through the RDEC Scheme. This is because the cost of the subcontracted activity will contribute to the contracting company’s R&D expenditure. HMRC applies this condition to stop excessive subsidisation of the same activity.

2. SMEs owned by big companies

Partner Enterprises

If a larger business owns your SME, you may need to claim through the RDEC Scheme. If your SME is 25-50% owned by a larger company, they are classified as a “partner enterprise,” and their assets, balance sheet, and employee count will proportionately contribute to your own. For example, if your SME is 33.33% owned by a company with 1500 employees, your employee count would be 500 + your company’s headcount.

Linked Enterprises

Alternatively, if your SME is more than 50% owned by a large company, then the total size of that business will apply to your calculation. The business will be classified as a “linked enterprise.” In this case, the entire total of their assets, balance sheet, and employee count will apply to your company’s profile when choosing which scheme. If you don’t know whether you are a partner or a linked enterprise, consult the EU criteria for SMEs (to which HMRC has applied) or get in touch with one of our team members.

3. Grant Recipients

If your grant counts as ‘notified state aid’, you may need to claim it entirely or partly through the RDEC Scheme. Most government-backed grants will qualify as notified state aid, although there are some exceptions.

Additionally, the proportion of qualifying expenditure that needs to be claimed through the RDEC scheme will depend on three things: the number of projects, the financial backing of those projects, and the nature of the way the grant is received. Find out more in our guide to grants and R&D relief.

Dividing up your claim between the two schemes can be difficult. If you require help dividing your claim between the two schemes or don’t know which scheme you should apply for, get in touch with one of our advisors.

How much will my business receive from the SME Scheme?

The research and development (R&D) tax credit scheme can benefit up to 27% of development costs. However, the cash benefit of an R&D Claim varies depending on your business’s Corporation Tax position and whether you’re breaking even, making a profit, or loss-making.

For all SME Claims, HMRC enhances your R&D expenditure by up to 86% of its value. So, if your business spent £100k on R&D, you would receive £86k. Once enhanced by HMRC, it’s your firm’s financial position that determines how much you receive back.

Example Calculations for SME R&D Scheme

Break Even SME

When your company breaks even, your R&D enhanced expenditure will now have a 10% tax relief applied instead of 14.5%, resulting in an 8.6% relief rate available instead of the 18.85% that was in effect before April 2023.

Loss-making SME

HMRC calculates your R&D tax credit when you’re a loss-making company by combining the enhanced R&D expenditure and trading loss. The new 10% tax credit rate is applied instead of 14.5%, resulting in an 18.6% relief rate available instead of the old 33.35% before April 2023.

Profit-making SME

To calculate the R&D tax relief as a profit-making company, first, deduct your increased R&D expenditure from your taxable profits. Then multiply that figure by the corporation tax rate to get your revised corporation tax bill. The money you save is calculated by subtracting the reduced corporate taxes bill from what it would typically be without the deduction.

Qualifying costs for the SME Scheme

Once you’ve found out that your activities qualify for R&D, you need to know which costs can be claimed.

Identifying R&D qualifying costs can be challenging, but the main ones are below:

• Staff Costs: Salaries, Class 1 National Insurance contributions, Pension contributions, Business expenses, Bonuses (where attributable to R&D)
• Subcontractor Costs: For unconnected subcontractors, you can claim 65% of the payment made, and for connected subcontractors, you can claim 100%.
• Externally provided R&D staff: Costs paid to a third party involved in the R&D project.
• Consumable items: Items directly employed and consumed in the R&D projects.
• Software licence fees: For software directly used in the R&D project.
• Clinical trials volunteer costs: Relevant for the pharmaceutical industry.

For more in-depth information, we recommend reading our qualifying costs guide.

Submitting an SME claim

There are usually six steps to submitting an SME claim:

1. Which project should I claim for? Break up your development work into a series of projects that meet HMRC’s guidelines.
2. Which scheme should I apply for? Decide between SME and RDEC based on your business size, finances, and other factors.
3. What is my claim size? Add up the eligibility costs and qualifying expenditures, ensuring you enhance your total expenditure by 86% for SME claims. You can also use our R&D tax credit calculator.
4. Write your technical narrative. Submit the technical narrative through HMRC’s new Additional Information Form, which explains your R&D’s scientific or technological advances.
5. Complete your CT600. Add your financial calculations into the CT600 form.
6. File your claim. Combine the Additional Information Form and CT600, then file your claim.

SME R&D tax relief scheme timeline

From 1 April 2023

Historically, small and medium-sized enterprises (SMEs) could claim up to 33% of their qualifying R&D expenses. However, as of 1 April 2023, the scheme became less generous.

Reduction for loss-making companies

For companies experiencing losses, the maximum claimable amount was reduced to 18.6% for R&D expenditure incurred between 1 April 2023 and 31 March 2024.

Increase for R&D-Intensive SMEs

On the other hand, R&D-intensive SMEs (where qualifying expenditure represents 40% or more of total expenditure) saw an increase in their claimable rate to 27%.

Between April 2023 and March 2024

• The enhancement rate for the SME scheme decreased from 130% to 86%.
• The tax credit rate for SME claims reduced from 14.5% to 10%.

These changes made the SME scheme less generous, although R&D-intensive SMEs benefited from a higher relief rate. The credit is not subject to corporation tax and can be recouped either as a cash payment or corporation tax reduction.

Merged scheme from 1 April 2024

From 1 April 2024, the SME scheme will be merged with the RDEC scheme, creating a single, unified merged R&D scheme.

• Loss-making companies will have a notional tax rate of 19%.
• R&D-intensive SMEs will continue to receive a higher rate of relief, provided their qualifying expenditure accounts for 30% or more of total expenditure.

For R&D-intensive SMEs with a small trading loss, it may still be worth considering claiming through the merged scheme. However, from 1 April 2024, R&D-intensive SMEs will claim through the Enhanced R&D Intensive Support (ERIS) scheme.

How EmpowerRD manage SME Claim

We’re here to help. Hundreds of SMEs have trusted EmpowerRD’s R&D platform and specialists to help them build optimised, compliant R&D tax claims. Please get in touch with one of our experts today if you have any further questions.