Innovation delivers competitive advantage, but many small and medium-sized enterprises (SMEs) miss the significant tax relief available when they invest in research and development (R&D). Understanding whether your business qualifies as an SME for R&D tax purposes is the first step in choosing the right incentive.
In this article
We break down the definition of an SME for R&D, how SME status affects your claim, and what has changed following the introduction of the merged scheme.
What counts as an SME for R&D tax purposes?
The UK government defines an SME as a company that meets all the following criteria:
- Fewer than 500 staff, and
- Either an annual turnover of under €100 million or a balance sheet total under €86 million.
These thresholds apply to the business as a whole, including any linked or partner enterprises. So if you sit within a group structure, you need to aggregate employee numbers and financials when assessing SME size. Moreover, the same applies even if not part of a group but companies are still controlled by the same individual.
Which R&D incentive should your business claim?
Your SME status determines whether you can claim under the SME R&D tax relief scheme or whether you must use the large company RDEC mechanism instead. But the date of your accounting period is just as important.
- If your accounting period began before 1 April 2024, the SME and RDEC schemes still apply.
- For periods starting on or after 1 April 2024, claims fall under the merged R&D scheme, with a separate route only for R&D-intensive loss-making SMEs (ERIS).
Choosing the right scheme matters. Each route has different eligibility rules, different rates, and different treatment of things like subcontracting and grants.
Claims for accounting periods beginning before 1 April 2024
Although the SME scheme is now closed to new periods, many companies are still preparing or amending claims that fall within it. Here’s what you need to know.
SME R&D rates
For qualifying expenditure, SMEs could claim:
- an additional 86% deduction on top of the standard 100% deduction, creating a total deduction of 186%, or
- a payable tax credit if loss-making: 10% of the surrenderable loss, or 14.5% for businesses meeting the “intensity” threshold.
Grants and subsidies
Receiving a notified State Aid grant for the same project normally pushed the R&D claim into RDEC instead of the SME scheme.
Non-notified subsidies may also restrict SME relief depending on the structure.
Subcontracted R&D
If you carried out R&D as a subcontractor, you generally could not claim SME relief for that work.
The company commissioning the work may claim instead, or the subcontractor may be able to use RDEC.
When a SME must claim RDEC
Once linked companies are included, you may no longer meet the SME thresholds and then need to claim under RDEC. That said, even if you meet the size thresholds, some circumstances require SMEs to claim under RDEC, for example:
- you received a notified State Aid grant for the R&D project
- you carried out subsidised R&D
- you performed R&D as a subcontractor
SME vs RDEC tax credits: what’s the difference?
A clear comparison helps businesses understand which route applies and why.
Eligibility
SME scheme (pre-April 2024):
- fewer than 500 employees and financial thresholds met, including linked enterprises.
RDEC:
- for larger companies, and
- for SMEs that do not qualify for SME relief (see above).
Rates of relief
- SME scheme: total deduction of 186%; payable credit for loss-makers at 10% or 14.5%.
- RDEC: for costs from 1 April 2023, the credit rate is 20%
Qualifying costs
Broadly similar cost categories are covered, including:
- staff costs
- externally provided workers
- software
- consumables
- some subcontracted R&D
The critical difference is who claims what, especially when subcontracting is involved.
Choosing Ayming as your partner
Working out whether you meet the official definition of an SME, assessing linked-company structures, and determining which scheme applies can be complex, particularly where grants, subsidies or subcontracting are involved.
At Ayming, we:
- confirm your SME status using the correct legislative thresholds
- identify, evidence and quantify all qualifying R&D activity
- structure your claim to maximise value under the correct scheme
- support you through HMRC enquiries and compliance checks
With decades of experience across innovation funding, we help businesses of all sizes unlock the financial benefit they’re entitled to.
Contact us today to explore your R&D options.