SME vs RDEC: Which R&D Tax Credit Scheme is Right for You?

R&D tax credits offer a powerful opportunity to secure funding for innovation. Both SMEs and large companies can claim under different schemes, but choosing the right one is essential for maximising your benefits.

Not only can they inject much-needed cash into your operations, but they also provide a window of up to 2 years after the relevant accounting period to make your claim.

However if you are planning to claim R&D for accounting periods beginning on or after 1 April 2023, you must submit a claim notification form to HMRC within 6 months of the year end if:

• You are claiming for the first time
• Your last claim was made more than 3 years before the last date of the claim notification period.

However, when it comes to choosing between the SME and RDEC schemes, several factors come into play.

Available R&D Tax Schemes

If your business is actively engaged in R&D activities, you could be eligible for financial support from HMRC through R&D Tax Credits. The key question then becomes: which scheme is the right fit for your company?

Both the SME (Small-Medium Enterprise) scheme and the Research and Development Enhanced Credit (RDEC) scheme offer avenues for claiming corporation tax relief on R&D expenditure.

To qualify for either, your projects must align with the UK government’s definition of R&D and involve making scientific or technological advancements, such as developing new products, processes, or services.

Key Differences Between SME & RDEC Schemes

For SMEs, the R&D tax credit scheme allows for significant deductions on qualifying R&D costs, injecting much-needed cash into operations. The RDEC scheme, often used by larger companies, provides a tax credit directly against your tax liability.

• SME Scheme: Designed for businesses with fewer than 500 employees and meeting financial thresholds, the SME scheme allows you to claim R&D costs with additional tax benefits.
• RDEC Scheme: Large companies can use RDEC, claiming tax credits for innovation, particularly when working on grant-funded R&D or subcontracted projects.

If you’re uncertain which scheme applies to your business, get in touch, and our experts will guide you through the process.

Transitioning Between SME and Large Company Status

It’s essential to consider how changes in your company’s size could impact your tax credit benefits.

HMRC allows for a transition period, permitting companies to maintain their SME or large company status in the event of fluctuations in staff count or financial thresholds.

This transition period applies to organic growth but not changes resulting from acquisitions, mergers, or linking with other entities.

Calculating Credits: SME vs RDEC

It’s crucial to understand that the calculation mechanisms differ between the SME and RDEC schemes.

While the SME scheme offers an enhanced deduction, allowing for an extra 130% of R&D costs, which reduces to 86% of R&D costs for accounting periods beginning on or after 1 April 2023, to be deducted from annual profit, RDEC provides an “above the line” expenditure credit, taxable as income and reducing corporation tax liability.

These distinctions hold true for both pre- and post-April 2023 expenditure, with rates and deductions adjusted accordingly.

Claim Processing Times

HMRC aims to process 95% of payable tax credit claims within 28 days for SMEs under the R&D tax credit scheme. However, claims through the RDEC scheme may take longer due to the increased complexity associated with larger businesses.

Seeking Expert Advice

At Lumo, our team of experts specialise in guiding businesses through the claiming process, ensuring you maximise your entitlements while complying with HMRC regulations.

Book a consultation today to explore your options and embark on your journey toward greater financial stability and innovation.