Research and development (R&D) tax relief is more generous for SMEs as they can claim up to 33% of their R&D costs, whereas companies under the RDEC scheme can only receive R&D tax relief of approximately 10.5% of qualifying costs.
To be classed as an SME claiming for R&D tax relief, the company must have less than 500 employees, and either:
- A turnover less than €100 million (excluding VAT).
- A balance sheet (gross assets) less than €86 million.
If you do not meet this requirement, then your R&D claim will be under the RDEC scheme for R&D tax purposes .
The 500 staff headcount will exclude:
- Apprentices
- Students on vocational contract.
- Employees on maternity or paternity leave.
Example SME for R&D tax relief
Company A is preparing an R&D tax claim and it employs 550 staff. It has a turnover of €90million and a balance sheet of €120 million.
Company A does not meet the criteria for qualifying as an SME, as it has more than 500 employees and a balance sheet exceeding €86 million.
Company A will prepare its R&D claim under the RDEC rules.
Connected Enterprises
The relationship between enterprises may result in aggregating the accounting data between enterprises. This can change a claimant from being treated under the SME scheme to the RDEC scheme.
There are three types of enterprises: autonomous, linked and partner enterprises.
Autonomous Enterprise
An autonomous enterprise has less than 25% of the capital or voting rights (direct or indirect) in another enterprise. An autonomous enterprise only uses its own accounting data to determine whether it is an SME.
Example
Company A is the claimant company and it owns 20% of the ordinary shares in Company B.
As Company A has less than 25% of the capital or voting rights in Company B, only Company A’s accounting data is used to determine if it is an SME.
Most companies will be an autonomous enterprise as stand alone companies.
Partner Enterprise
A partner enterprise has between 25% and 50% of the capital or voting rights (direct or indirect) in another enterprise.
Example
Company A owns 30% of the ordinary shares of company B.
Company A has 400 employees with a turnover of €70 million and a balance sheet of €50 million.
Company B has 150 employees with a turnover of €70 million and a balance sheet of €50 million.
Within this scenario, we aggregate the accounting data of both companies based on the percentage of holding. As Company A is the claimant, we aggregate all of Company A’s accounting data with 30% of Company B’s accounting data.
Employees: 400 + (30% x 150) = 445 employees
Turnover: €70mn + (30% x €70mn) = €91mn
Gross Assets: €50mn + (30% x €50mn) = €65mn
None of the thresholds have been exceeded so Company A is an SME for R&D tax purposes.
The final point regarding partner enterprises is that there are excepted rules for specified investors that are not linked to the enterprise (individually or jointly).
These include:
- Venture Capital Institution - VC
- Public Investment Corporations
- Institutional Investors
- Regional Development Funds
- Business Angels (investment less than €1.25mn - individually or jointly)
- Universities
- Not For Profit Research Centres
- Local Authorities
Linked Enterprise
Linked enterprises have control of another enterprise.
Control includes:
- Possession of a majority of the voting share capital (more than 50%)
- Being entitled to acquire the majority of the voting share capital
- Being able to appoint or dismiss the majority of any supervisory or executive officers
- Being able to control key aspects of the business, or prevent any material exercise of discretion in such areas by the executives.
With linked enterprises, you aggregate all the accounting data.
Example
Company A is the claimant company and it has 55% of the ordinary shares in Company B
Company A has 200 employees, turnover of €90mn and a balance sheet of €70mn.
Company B has 150 employees, turnover of €15mn and a balance sheet of €10mn.
The aggregated accounting data will be:
- number of employees 350
- turnover €105mn
- balance sheet €80mn
As the employee count is below 500 Company A is treated as a SME.
The hidden complexity of an enterprise
The term enterprise is a broad term and it includes:
- Individuals
- Partnerships
- Associations
- Charity
- Universities
- Statutory bodies
- Government
Individual A that owns 70% of Company A and 100% Company B may have to aggregate the accounting data of both companies if either company is making a R&D claim.
Company A and Company B will only be treated as linked enterprises, if both companies are in the same or an adjacent market.
Example 1
Company A - develops car parts
Company B - manufactures car
These are in adjacent markets.
Example 2
Company A - develops software for childrens educational
Company B - develops software for learning and development for large corporations
These are in the same market.
Example 3
Company A - manufacturer paints
Company B - sells computer parts
These are not in the same market nor in an adjacent market.
Changing between SME and RDEC
Depending on the staff count, turnover and gross assets a company can fluctuate between the SME scheme and RDEC scheme. There are rules to help maximise your claim in this situation.
