Back to blog

Changing Company Status & Effect on R&D Tax Credits

R&D tax credits can be claimed through the Small and Medium Enterprise (SME) scheme, the R&D Expenditure Credit scheme (RDEC scheme) and, more recently, the Merged Scheme. Knowing which scheme applies to you can be tricky, with lots of caveats and quirks. Largely, the size of the company determines if you’ll be claiming through the SME scheme, with its higher rate of relief, or the RDEC scheme.

But what happens when a company changes size? As a rule, HMRC has a grace period, or a transition period, for companies that go from SME to large, or large to SME. This means companies will continue to claim under whatever scheme they were using prior for the first year they change status.

This supports companies that walk the line from changing schemes with each fluctuation of the business size.

A Small and Medium Enterprise, or SME, has a specific definition within the UK’s R&D tax schemes. To qualify as an SME, a company (or a group of companies) must:

• Have a staff headcount of below 500
• And have either:
  • A turnover of below €100 million, or
  • Gross assets of less than €86 million

Any company exceeding these limits is considered a large company and must claim through the RDEC scheme for accounting periods beginning before 1^st April 2024.

In most cases, SMEs will be claiming through the SME scheme, which offers up to 33% of R&D costs back.

Usually, if a company goes above or below the staff count or financial limits on the balance sheet date, it won’t change its status from an SME to a large company – or the other way around – until this happens for two years in a row.

The balance sheet date is the last day of the accounting period. Company headcounts are usually determined by taking an average of the staff totals per month (i.e., adding each month’s total and dividing by 12).

For example:

Company A has 490 employees in the accounting period ending 31^st March 2021.

It then has 505 employees in the accounting period ending 31^st March 2022.

It has 510 employees in the accounting period ending 31^st March 2023.

In this example, the first accounting period is within the SME thresholds and therefore can claim through the more generous SME scheme. In the second period, the company crossed the threshold and should be considered a large company. However, due to the grace period, the company can continue claiming as an SME. In the third year, the company is actually considered a large company, as it has surpassed the SME thresholds for two years in a row.

However, if a company crosses the SME threshold in one period, then comes back below it in the next, it will be considered an SME consistently.

Unfortunately, the rules work both ways. Large companies will still need to claim through the RDEC scheme for the first year they meet the SME standards and, therefore, receive a lower benefit than through the SME scheme. This may happen in the event of a demerger, or just a reduction of the company’s workforce and operations.

The grace period does not apply to companies that become large companies through acquisition. This applies to businesses that exceed the thresholds by including the headcount, balance sheet and assets of a partner or linked enterprises that already exceed the thresholds.

However, this only applies in the instance of a large company acquiring a SME. Two SMEs that become linked will be able to claim through the SME scheme during the transition period.

If a company is taken over by a large company (or a collection of smaller companies which collectively are considered a large company), then it will be considered a large company for the period in which the acquisition happened. This is the case, even if the acquisition happens shortly before the end of the accounting period, despite the eleven months of work done as an SME.

To mitigate for this loss, the SME that will be acquired could request for the acquisition to occur following the end of the accounting period or shorten its accounting period to end the day before the acquisition. This will allow the SME being acquired to claim its full entitlement under the SME scheme, instead of reducing its benefit by claiming through the RDEC scheme as a large company.

These provisions lose a lot of their importance with HMRC’s drastic changes to the R&D tax schemes. For accounting periods beginning on or after 1^st April 2024, SMEs and large companies will both have to claimed through the Merged Scheme which, as you can imagine, merges the SME and RDEC schemes.

However, the exception to this rule is for loss-making R&D-intensive SMEs, who can claim a higher rate of relief through the Enhanced R&D Intensive (ERIS) scheme. For these purposes, the above guidance will still apply to establish if a company is still an SME and can claim via the ERIS scheme.

It’s likely that you’ll still have questions, as this is a complex area of the R&D tax guidelines. Please get in contact with our team if you want to find out how these rules apply to your company. With over 20 years of experience making R&D tax claims, we’re confident that we can help sort through the legislation and get you the answer you need.

Tax Cloud is an online guided portal which lets you take charge of your claim, while being confident that your claim is accurate, maximised and completely compliant.