SME Tax Relief – The Facts
The form of SME relief is:
- an Enhanced deduction of 130%. This means that in total, one can claim a total deduction of 230%;
- If the Company is making a loss then it is possible for the Company to sell the loss that is attributable to R&D expenditure to HMRC for 14.5%.
The Company needs to meet the test to be a SME and satisfy other requirements. These are set out below.
We also set out below the form of the relief.
What is an SME?
This is a two limb test and we must meet both limbs
Firstly, we must meet the employee test – which is that the Company must have less than 500 employees.
This test is slightly odd in that we calculate ‘annual worker units’. Basically this is full time person years.
As an example.
Co A has 100 employees at the end of the year.
60 are full time and worked the full year. So this is 60 annual worker units.
20 were taken on half way through the year – so this equals 10 annual worker units
Another 20 only worked 2.5 days per week but were employed the full year. This equals 10 more annual worker units.
As such, the total for the SME test is 80 employees
Once we have satisfied that threshold test, then we must meet one or other (or both) of the following:
- Turnover test – must not exceed €100m and / or
- Balance sheet – must not exceed €86m
The turnover test applies to a year. As such, if the accounting period has been shortened / extended then the test is adjusted accordingly.
The balance sheet is simply the balance sheet taken from the relevant financial statements.
The Company Must Be Independent
This means that no more than 25% of its share capital may be owned by a Company that is not an SME.
So, our Company can be in a group, but the whole group must meet the SME criteria.
There is an exception for VC firms and institutional investors – but they cannot have control.
Linked & Partner Enterprises
If you have either a Linked Enterprise or a Partner Enterprise then these affect how we apply the tests for SME as set out above.
A Partner Enterprise is:
- one which is not a Linked Enterprise
- One holds 25% or more of the other (capital or voting rights)
The affect of this is that, when we assess the data for the SME test, we need to attribute a proportion of the partner enterprise(s) to the Company being tested.
So for example, Company A holds 40% of Company B – then 40% of the staff, turnover and assets of one company are ascribed to the other when assessing the businesses against the SME test. So it has a pro-rata affect.
A Linked Enterprise is one that controls, or is controlled by, another enterprise.
The affect is that the SME tests – eg headcount, turnover etc – are applied to the aggregate figures of all the Linked Enterprises.
Must Be A ‘Going Concern’
This should be relatively self-explanatory.
Note, perhaps relevant in the current times, the Company cannot be considered a going concern on the proviso it receives the R&D tax relief (ie it receives the payable tax credit).
If the Company is in administration then not a going concern.
For qualifying expenditure, please see our detailed article
Forms of SME Tax Relief
The relief is in the form of an allowable expense allowable for tax purposes. The enhanced deduction is 130% of the qualifying expenditure means that the total deduction is 230%.
This will either:
- Reduce a profit;
- Turn a profit in to a loss; or
- Increase a loss
Losses may be carried forward, group relief etc. Alternatively, the loss may be surrendered for a cash repayment from HMRC (See Payable R&D tax credit).
Relief must be claimed within 2 years of the end of the accounting period to which the claim relates.
The claim is either made on the tax return or via an amended tax return.
Payable Tax Credit
As stated above, the Company may surrender the loss that relates to the R&D claim.
HMRC will make an immediate cash payment from HMRC.
The ‘surrender rate’ of is 14.5% of the loss (albeit this can be adjusted in some scenarios).
If you have any queries about SME relief, or R&D in general, then please do not hesitate to get in touch.