HMRC\u2019s R&D tax credit scheme for SMEs is more rewarding than that for larger businesses but this doesn\u2019t mean they\u2019re always allowed to access it.\r\n\r\nTo be an SME for R&D purposes, a business has to have a head count of less than 500 employees as well as either a turnover of less than \u20ac100m (\u00a391m) or assets of less than \u20ac86m (\u00a378.6m).\r\n\r\nOtherwise the company is considered a large business and will have to apply for R&D tax relief under the RDEC (Research & Development Expenditure Credit for large companies) scheme.\r\n\r\nHowever, smaller firms that would otherwise be classed as SMEs under this test can sometimes miss out on the SME scheme because they have a business connection to each other. This is because the rules state that connected parties must be judged on their combined scale.\r\n\r\nSo when a company has a business arrangement with another firm in the same or an adjacent sector, their workforce, turnover and assets must be added together when applying the SME test.\r\n\r\nBut it\u2019s not just business connections that force tax advisers to aggregate these statistics. The same requirement applies when members of the same family own separate businesses.\r\n\r\nFor example, if two sisters owned separate businesses in the same or an adjacent sector, then HMRC says these firms must also be judged according to their combined size.\r\n\r\nFortunately, there is a point at which two business owners can be related but the rule no longer has effect, as it only applies to close family members. HMRC distinguishes between lineal and non-lineal family members so the requirement to aggregate only applies to siblings, parents and children but not cousins, aunts and uncles.\r\n\r\nCatax specialises in businesses who qualify for the SME scheme precisely because it produces a much higher return on clients\u2019 R&D spending. Occasionally, because of the aggregation rules, we do have to tell clients that they won\u2019t be able to claim under the SME scheme but it can also work the other way round.\r\n\r\nAn example of when this rule meant a company wasn\u2019t able to use the SME scheme was when a rail construction group consisting of two companies in the same trade tried to claim R&D tax credits. Each was owned separately by two brothers. Individually, these firms would have been small enough to qualify for the SME scheme but, taken together, the aggregate rule meant they were classed as a large company for R&D purposes.\r\n\r\nConversely, in some circumstances it is possible for firms who have previously claimed under the large companies scheme to be reclassified as SMEs for R&D purposes.\r\n\r\nCatax previously made a claim on behalf of a food wholesale group that had a business relationship with another company in the same sector. Both had been set up separately by two brothers but it transpired that they had recently passed ownership of the businesses to their children, meaning it was now two sets of cousins who owned the companies, not brothers. This meant they could both now claim under the more beneficial SME scheme.\r\n\r\nOften, it is not immediately apparent how individuals are related. It\u2019s vital that accountants and tax advisers establish what associated companies exist and the relationship between owners.\r\n\r\nThis is the only way to avoid claiming too much relief under the SME scheme or too little relief under the RDEC scheme.\r\n\r\n\r\n\r\nRachel Brett is a Senior Tax Analyst at specialist tax consultancy Catax.