SME vs RDEC (Including Contract Review)
Understanding the distinction between the SME vs RDEC schemes is crucial for any business looking to benefit from UK R&D tax relief. The two regimes—designed for different types of companies—come with separate eligibility rules, claim calculations, and restrictions. However, real-world business arrangements are not always simple. Many companies, especially small and medium enterprises working with grants, public contracts, or third-party funders, can find themselves inadvertently applying the wrong rules.
My Tax Consultants support businesses across the UK in making clear and defensible decisions about which scheme they fall under. Our advisory service focuses on both the tax technicalities and the legal framework—especially the wording and structure of your contracts, which can significantly impact the outcome of your claim.
Understanding the SME and RDEC R&D Tax Relief Schemes
To be eligible for the SME scheme, a business must have fewer than 500 employees and not exceed either a €100 million turnover or an €86 million balance sheet total. Companies that qualify can benefit from a deduction of up to 186% of their qualifying R&D costs, with the potential to receive a cash credit of around 21.5% if they are loss-making.
By contrast, the RDEC scheme (Research and Development Expenditure Credit) typically applies to larger companies, or to smaller businesses that are undertaking R&D on behalf of others or receiving certain types of funding. The RDEC scheme offers a taxable credit—currently around 13%—which must be brought into account as income in the company’s tax calculation.
The line between SME R&D tax credit and RDEC is not always obvious. A business may qualify as an SME under the Companies Act but be required to claim under RDEC due to the structure of its funding, group relationships, or contractual obligations. Public subsidies or grants can also shift an otherwise qualifying SME into the RDEC regime, reducing the available benefit. This is where correct classification becomes vital—and where many companies make costly mistakes.
How Contracts Affect RDEC Eligibility and Scheme Selection
The contracts that govern your R&D activity often determine which scheme you must use. HMRC’s guidance on RDEC eligibility is based not just on company size or funding source, but also on who bears the financial risk of the R&D work, and who retains the rights to the outcome. Misunderstanding or misinterpreting your contracts can result in incorrect claims, repayments, or penalties.
That’s why our RDEC contract review is a core part of this subservice. We examine the language of your contracts—between your company and any clients, subcontractors, funding bodies, or group members—to determine which party can claim and under what scheme. For example, a contract may state that your company performs R&D for a client but may also specify who owns the results, who pays for what, and who directs the work. These clauses influence whether you are eligible to claim under the SME vs RDEC R&D tax relief schemes, and whether the expenditure is subsidised.
Typical Scenarios We Assess
Many businesses come to us when their situation is more complex than it seems. A few typical scenarios include:
- SMEs conducting R&D for larger businesses under contractual arrangements
- SMEs receiving Innovate UK or EU Horizon funding
- Group structures where R&D is carried out by one company but funded by another within the same group
- Businesses outsourcing R&D while retaining technical direction and financial responsibility
These are the kinds of situations where generalised advice or assumptions can lead to misfiling. Our team interprets the legal language of your contracts with a clear focus on tax eligibility, and aligns it with current HMRC practice and case law.
Why Accurate Scheme Selection Matters
Choosing the wrong scheme is not just a technicality—it can significantly reduce your benefit or delay your claim. Filing under the wrong regime can also trigger HMRC enquiries, especially where the amounts are significant or where contracts suggest a different classification. When you work with My Tax Consultants, our contract review and R&D assessment helps you:
- Avoid misclassifying your company as an SME or large business
- Understand how grants or funding affect your scheme position
- File claims that are clear, well-supported, and aligned with HMRC expectations
Getting this right from the start saves time, protects your cashflow, and reduces your exposure to compliance risk.
Book a Contract Review Consultation
If you’re unsure which scheme applies to your company, or if your contracts involve R&D and funding across multiple parties, our team can help clarify your position. We’ll walk you through the differences between SME vs RDEC, review your contracts, and advise on the most accurate and beneficial approach.
