In our regular Q&A series, Croner Taxwise, tax consultant, David Woolley, explains how to define when an SME becomes a large business for research and development (R&D) purposes
Q. I act for various companies that have been claiming R&D SME relief on a number of qualifying projects over the years. Some of these companies have prospered and grown and I am concerned that they may no longer qualify for the SME relief. Although there is plenty of guidance available as regards the definition of an SME, I can find little guidance on when a company becomes large.
A. The definition of an SME for R&D purposes is given by s1119 Corporation Tax Act (CTA 2009) which simply refers to the definition given in Commission Recommendation (EC) No. 2003/361 – subject to the exception in s1120 CTA 2009 referred to below.
Article 4 of the 2003 Recommendation gives SME’s a ‘grace period’ whereby an SME that becomes large in an accounting period is only treated as becoming large in the second period that it breaches the SME test.
Remember that the ‘employee test’ in the Recommendation is the dominant test. If the company fails the employee test then is not an SME (but can utilise the grace period rule).
If a company meets the employee test, it must then pass either the turnover or balance sheet test to be an SME. HMRC’s introduction to these principles is in the Corporate Intangibles Research and Development Manual (CIRD91100).
The grace period mentioned above equally applies to large companies that become SMEs. Such companies remain large until they are SMEs in the second successive period that it becomes an SME.
The tests are always carried out at the end of the accounting period as per the EC Recommendation.
The exception to the grace period is in s1120 CTA 2009 and states that if a company joins a large group, the grace period is ignored and the previous SME becomes a large company in the period in which it becomes a member of the group.
In other words, only organic growth of the company itself permits use of the grace period.
HMRC’s guidance on the above is at CIRD92000.
(At the time of writing, it is not known how Brexit will affect the above rules).