Corporation Tax: Research and Development tax relief for small or medium sized enterprises
Find out about Research and Development (R&D) tax relief for small or medium sized enterprises (SME), qualifying projects and costs, claiming and keeping records.
A small or medium sized enterprise (SME) is a company with less than 500 employees with either:
- an annual turnover under €100 million
- a balance sheet under €86 million
Your company isn’t an SME if it’s part of a larger enterprise that, when taken as a whole, would fail these tests.
When considering these limits, you should also include any linked, partnership or shareholding companies that have at least a 25% share in your company and/or any company that your company holds a 25% share in.
The definition of an SME for R&D tax relief purposes isn’t necessarily the same as that used by HM Revenue and Customs (HMRC) in relation to other areas of Corporation Tax (CT) or other tax areas like PAYE, or by other government agencies.
You can’t claim R&D tax relief under the SME Scheme if you’re a subcontractor - that is, if you’ve been subcontracted to do the work on behalf of somebody else. But, even if your company is small or medium-sized, you may be able to claim as a subcontractor under the Large Company Scheme.
The SME tax relief scheme
You can only claim under the scheme for SMEs if your company meets the definition of a SME for R&D tax relief purposes.
In certain specific situations, even if your company meets the definition of an SME, you may not be able to claim relief under the SME Scheme. But, you may be able to claim under the Large Company Scheme. This means that, if your company is small or medium-sized, you may be able to claim R&D tax relief under the SME Scheme for one project and the Large Company Scheme for another.
You can only claim R&D tax relief as a SME if your company is a going concern and not in administration or liquidation when you make your claim. If you’ve made a claim and the company then ceases to be a going concern you can’t get a tax credit.
Subsidies and grants
If your company receives a subsidy or grant for an R&D project, this may affect how much tax relief you can claim.
R&D tax relief for SMEs is a state aid.
When you or your company receive more than €500,000 a year from the scheme, details will be published annually on the European Commission website.
If additional information is needed HMRC will contact you.
For other types of subsidy or grant, the R&D expenditure you can claim for is reduced by the amount of subsidy or grant received. You may be able to claim under the Large Company Scheme instead.
Rate of tax relief
This scheme has higher rates of relief from 1 April 2015. The tax relief on allowable R&D costs is 230%. This means that for every £100 of qualifying costs, your company could reduce your CT by an additional £130 on top of the £100 spent.
Example - R&D tax relief for expenditure of £20,000 where the company has made a profit of £26,000
|R&D Relief||£20,000 × 130% = £26,000|
|Normal taxable profit||£26,000|
|Taxable profit less R&D Relief||£26,000 - £26,000 = 0|
|Revised taxable profit||0|
If your company has an allowable trading loss, this can be increased by 130% of the qualifying R&D costs - so that’s £130 for each £100 spent. This loss can be carried forward in the normal way, but only if you choose not to convert it to tax credits.
Example - R&D tax relief for expenditure of £20,000 where the company has made a loss of £10,000
|R&D enhancement||£20,000 × 130% = £26,000|
|Normal trading loss||£10,000|
|Trading loss less enhanced by R&D tax relief||£10,000 + £26,000 = £36,000|
|Loss available to carry forward or back for Corporation Tax purposes||£36,000|
R&D tax credits
If your company makes a loss, you can choose to receive R&D tax credits instead of carrying forward a loss. It’s a cash sum paid to you by HMRC.
Example - converting R&D tax relief on expenditure of £20,000 to a tax credit payment for accounting period commencing 1 April 2015 and ending 31 March 2016
|R&D enhancement||£20,000 × 130% = £26,000|
|Normal taxable profit||£6,000|
|Trading loss (after R&D tax relief)||£20,000|
|R&D expenditure qualifying for conversion to credits||£20,000|
|Potential tax credit||£20,000 × 14.5% = £2900|
|Payable tax credit||£2,900|
|Losses available to carry forward or back||Nil|
You can find out how to convert tax relief into payable tax credits in the Corporate Intangibles Research and Development Manual. There were different rates for R&D tax relief for SMEs before 1 April 2015.
Published: 23 December 2015
Updated: 19 October 2016
- Guidance updated to advise companies if they receive more than €500,000 a year in state aid, certain details will be published on the European Commission website.
- First published.