What is An SME For R&D Tax Purposes? EPISODE 5 #therdtaxshow - YouTube

I've had a question from Kurt and he wants to know what makes a company an SME

for R&D new tax purposes. So if you want to find out stick around. LET'S GO!

Welcome to The R&D Tax Show where we help accountants, tax advisers

and their clients claim R&D tax relief. I'm Tehsin the founder of

GrowthPad and we help companies claim R&D tax relief.

So as I said in the introduction today we are going to talk about which companies qualify as an SME.

So I think it's first important to establish why this matters in the scope

of R&D tax relief. So in short, an SME can recoup approximately 25% of its R&D

costs, whereas a company that's not an SME, usually a large company,

can only claim back approximately 10.5% of its development costs. Now

that's slightly increased for the RDEC companies in the Spring Budget that we

had recently. So now that we've established why it's important, let's go

into the definition of what qualifies as an SME. So an SME has

less than 500 employees and turnover less than €100 million or a

balance sheet less than €86 million. So let's write this down so we can refer

to it throughout this talk. Less than 500 employees (sorry my board is wobbling) and less

than €100 million in turnover or €86 million on a balance sheet

specifically as gross assets. Now the employees,

what's excluded from that count is employees on apprenticeships or on

some other vocational student contract. They also exclude parents that are on

maternity or paternity leave. The €100 million turnover thats referred to

here, that obviously excludes VAT. Now you must be wondering why it's in Euros, well

the definition of an SME has come from the European Commission so we've

used their definition. So when we're calculating our figures, for this what we

need to do is convert these values from pounds into into euros and you can do

that at the balance sheet date. This data, I'll refer to this as the accounting

data throughout the show just easier to refer to that way. So as an example let's

say company A is making a claim and it has employees of 450, turnover of €90

million and a balance sheet of €120 million. So in this scenario, we've met

the criteria of having less than 500 employees so that qualifies. Turnover

is less than €100 million so because it meets that this company will

qualify as an SME. So the relationship between enterprises can affect how we

determine what an SME is and in these scenarios we may have to aggregate

the accounting data for various enterprises. So we'll go through those

now. Generally, there are three types of enterprises an autonomous, partner

enterprises and linked enterprises and we'll go through each in turn.

Let's start with autonomous, it's the easiest one. Blues running lets get the black pen out.

So autonomous is when either, let's do it on a scenario basis.

So let's say Company A is the claimant and there's a Company B. So if Company A controls

Company B and it has between 0% and 25% of control, that can be direct or

indirect, then that makes Company A an autonomous enterprise. What will happen in

this scenario is we'll just use the accounting data for Company A to

establish whether it's an SME or not. So most companies will be like this.

They'll either have a company that they've invested in or it could also be that

Company B's invested in the claimant company. So it can be vice versa.

Most companies will be like that or Company A might be standalone or in that case, it's

still gonna be autonomous. So that's the most straightforward scenario. The next

is partner. So this is when the claimant company we'll call it A again

has between 25% and 50% control in Company B. Now yet again that control can

be the other way around, so Company B may have control of Company A. So in this scenario

we have to establish what the company a is an SME. So let's give you guys some

data to work with so employees turnover balance sheet.So employees, let's say

Company A has 400 employees, turnover, let's keep it in euros. Let's say €70 million, let's

say balance sheet is €50 million. Let's say Company B has turnover of hundred..sorry,

employees of 150, turnover of €20 million and the balance sheet of €10 million.

So what we do in this scenario is we aggregate the accounting data of Company A

and Company B. Let's say in this scenario Company A owns 30% of Company B.

So what we'll do here, we won't aggregate the total of Company B, but we'll take

30% of Company B's accounting data and add it to Company A's to determine

whether the company qualifies as an SME so 45, 6 & 3. So in total, we've got

445 employees, €76 million and the balance sheet

will be €53 million so we can immediately see that employees still remain

below 500, so it meets the employee criteria. Then we look at

turnover, we can see that the turnover is below €100 million. So if

Company A did put a claim through it'll remain as an SME. So the final thing to know in

regards to partner enterprises is that there's some excepted rules for certain

organisations that have more than 25% but less than 50% control

in or either controlled by (in rare cases), by the claiming company. So these include

venture capital companies, institutional investors , regional funds, universities

and not-for-profits. An important one to put in our list is "Business Angel". So

they can be singularly or within a group and they can invest up to €1.25

million into the claiming company without becoming

a partner entity. So we've covered partner entity and now we'll cover

linked which is the final one. It's actually more straightforward

compared to partner enterprises. This is for enterprises that have more than 50%

control direct or indirect or they are controlled by. So company A again

is a claimant company, we've got company B so if Company A has more than 50%

control in Company B. Or company B has more than 50% in Company A, A will be

treated as a linked enterprise for the SME rules. So let's go through how that

affects the accounting data, as we did with the last example. So we've got

employees, turnover and balance sheet. So let's say Company A has 200 employees,

turnover of €90 million and a balance sheet of €70 million and Company B has 150

employees, turnover of €15 million and a balance sheet of €10 million. So for

partner enterprises what we did was we took a proportion of the ownership of A

and B. So let's say in this example A owns 70% of B. So what we did in the

previous example, we took 70% of the accounting data for B. But when a company

is linked with another enterprise we don't do that. We have to take the total

amount of accounting data details of Company B, irrespective of the actual

control it has. So what that means is employees here will be 350, so it's less

than 500. Turnover will be €105 million, which means it won't meet that

turnover rule. But the balance sheet is €80 million so because it has less than

500 employees and the balance sheet is less than 86 million, Company A will

continue to be an SME. A final thing to note is that

these rules of enterprises, they extend to individuals as well and I'll show you in

which type of scenario. So let's say the Company Z is in a group with A and B

and that owns 100% of both A and B. That's clearly a linked company

So when it has to determine whether it's an SME it has to

look at the accounting data for itself also A and B. Under these rules we

have to kind of look through the ownership of Z. So let's say Mr. Y owned

Company Z and Mr. Y, outside of this group structure owns a sole trader.

Let's call it T. If that sole trader is in an adjacent market with the claimant

company then you also have to include its accounting data with the claimant

company'. So let's say Z was claiming, that will now look at its own accounting

data, A's, B's and T's, but only if T is in the adjacent market to Z. So adjacent

market would mean, let's say if Z created software for accounting

professionals creating CRMs but T developed

CRMs for recruitment of companies. They're in adjacent markets so you'd include it

but let's say T manufactured chemicals, they're clearly not in the same market.

so in that scenario you wouldn't include T's accounting data with the

rest of these companies. So I hope that was helpful.

I've covered the basics and slightly beyond the basics and it does get more

complicated but the other complexities are quite rare. So you've got any

questions get in touch. Thanks for Kurt for the question, really

appreciate it. Take care. Bye!