Companies can reduce their tax bill or claim payable cash credits as a proportion of their R&D expenditure.
The UK scheme is volume-based because the incremental approach provides limited or no encouragement to businesses whose R&D spending fluctuates or remains at a steady level (for instance in times of macro-economic volatility).
The definitions of large and small company size are driven by the EU classifications (and adjusted for UK R&D Tax Credit purposes) including revenues, number of employees and balance sheet assets.
If the company has made a loss, then the scheme goes even further and allows the alternative of a cash payment of up to 32.63 per cent of the eligible R&D investment.
A large company is able to claim an additional 30 per cent of its eligible R&D costs from its taxable income as a superdeduction.
HMRC publish full details of the progression of the tax deduction and payable credit rates on their website .
[4] The steady state cost of the whole scheme is approximately £1.3 billion[5] per annum in terms of corporation tax revenues foregone by HM Treasury.
The EC SME thresholds were extended by UK legislation at 1 August 2008 (Corporation Tax Act 2009: Sections 1119 - 1121).
If the enterprise fails to meet these targets, it is not considered an SME and must instead claim under the Large Company R&D Tax Relief scheme.