A company's status for research and development (R&D) tax relief is dependent on its staff count, turnover, and gross assets. This accounting data determines whether a company falls into the SME scheme or the research and development expenditure credit (RDEC) scheme.
This is important because an SME can recoup up to 33.35% of its qualifying R&D expenditure and a company under the RDEC scheme can only recoup 10.53%. Each scheme also has its restrictions of qualifying costs.
What happens when the change in schemes occurs?
There are many changes that can happen to a business. These changes can be determined by internal or external factors.
A company claiming R&D tax relief under the SME scheme could expand its workforce, resulting in having more than 500 employees.
If this company also does not have either:
- A turnover less than €100 million.
- A balance sheet (gross assets) less than €86 million
…then it will no longer be able to claim under the SME rules but instead will have to claim R&D tax relief under the RDEC scheme.
Similarly, a company with more than 500 employees may terminate the employment of its staff resulting in less than 500 employees, going from the RDEC scheme to the SME scheme.
These two scenarios illustrate that the threshold can easily be crossed.
The year of grace rule prevents the change in the company’s status until the conditions are met for two consecutive years. This enables the company to plan and implement changes for the future, potentially helping to maximise R&D tax claims.
The year of grace does not apply if a SME is acquired by a large company.
