There are two different R&D schemes, the Small and Medium Sized Enterprises (SME) Scheme and the Research and Development Expenditure Credit (RDEC) scheme.
The two schemes work very differently, but both aim to reward innovation by reducing corporation tax. In order to be eligible to claim under either scheme the projects undertaken must meet the definition of R&D, which is the same for both schemes.
The main test to determine which scheme a company is eligible to claim under concerns the size of the company. If a company has fewer than 500 employees and turnover of less than €100m or a balance sheet total under €86m then they may be eligible to claim under the SME scheme.
Small companies whose expenditure has been subsidised, or those who have been subcontracted to carry out R&D work will not be eligible to claim under the SME scheme, but may be able to claim under the RDEC scheme.
A small company may claim under both schemes. This could happen if several R&D projects have been undertaken, one of which is grant funded and falls under the RDEC scheme, with the remainder being eligible for the SME scheme.
SME
The SME scheme provides an additional 130% deduction for qualifying expenditure against profits, giving a total deduction of 230%.
The additional deduction will reduce the taxable profit, thereby reducing the corporation tax liability. Should the additional R&D deduction result in a taxable loss it is possible to surrender this for a cash credit. Alternatively the loss may be carried back, carried forward or group relieved.
RDEC
The RDEC is a taxable credit of 13% of the qualifying expenditure. As the RDEC is taxable at 19% the effective benefit is 10.5% of the qualifying expenditure.
As a tax credit the RDEC must first be used to settle the current year’s corporation tax liability. However if there is no tax liability, subject to caps and restrictions, it may be possible to receive a cash credit.
Small companies who have been subcontracted by a large company may be eligible to claim under the RDEC scheme. Small companies whose expenditure has been subsidised may also be able to claim under the RDEC scheme.
The RDEC scheme has restrictions regarding claiming subcontracted expenditure. Under the SME scheme sub-contractor costs qualify, regardless of the entity carrying out the work. However under the RDEC scheme only work carried out by a charity, higher education institute, health service or an individual will qualify.
Contact us on 028 9040 6295 to discuss which scheme your company is eligible to claim under.