Global R&D tax incentives for SMEs: A cross-country comparison

In the global economy, small and medium-sized enterprises (SMEs) play a crucial role in driving innovation and economic growth within the middle-market. Recognising this, many countries have implemented research and development (R&D) tax incentives specifically tailored to support SMEs. In this article, our RSM’s Global Incentives experts compare and contrast SME-focused tax incentives in Australia, New Zealand, Singapore, the USA, Canada, the United Kingdom, Germany, and France.

Overview of R&D incentive programmes for small and medium-sized enterprises

Australia: The Research & Development Tax Incentive (RDTI)

Australia's RDTI is a self-assessment programme designed to be broadly inclusive, minimising compliance burdens and encouraging spending on innovative activities. For SMEs with an aggregated turnover under AUD$20 million, the programme offers a refundable tax offset of up to 48.5% on eligible R&D expenditure (including “cashing out” the related tax loss). There are also various Federal and State grants specifically targeted at SMEs.

Canada: Scientific Research and Experimental Development (SR&ED) Programme

Canada's SR&ED programme offers a Federal-enhanced 35% refundable rate for Canadian-controlled private corporations (CCPCs) and 15% non-refundable credit for foreign-controlled, large private and publicly traded companies. In addition to the Federal SR&ED credit, companies also receive a Provincial SR&ED credit that ranges between 3.5% to 20%. The combined SR&ED tax credit is up to 64% for Canadian SMEs, and 36% for foreign-controlled, large private and publicly traded companies. The country also provides over 500 different government grants and incentives covering various business activities.

France: Multiple R&D incentives

France offers several R&D incentives, including the Crédit d'Impôt Recherche (CIR) with a 30% tax credit on R&D expenses up to EUR 100 million (and a 5% tax credit on R&D expenses above EUR 100 million). The country also provides specific incentives for collaborative research, innovation, and green industry investments.

Germany: Research Allowance

Germany's research allowance offers a 35% funding rate for SMEs, which is 10% higher than for non-SMEs. The maximum amount can reach up to EUR 3.5 million per year for SMEs.

New Zealand: R&D Tax Incentive and Loss Tax Credits

New Zealand's R&D Tax Incentive provides a 15% tax credit or refund on eligible R&D expenditure. Additionally, the R&D Loss Tax Credits (RDLTC) programme allows R&D companies to "cash out" their tax losses, providing financial support before they become revenue-generating.

Singapore: R&D Tax Incentive and Grant Programmes

Singapore offers a cash benefit of up to 51% on the first SGD 400,000 of qualifying staff and consumable costs through its R&D Tax Incentive. The country also administers various grant programmes to support startups and SMEs, such as Startup SG Founder and Startup SG Tech.

United Kingdom: R&D Expenditure Credit (RDEC) and Enhanced R&D Intensive Scheme (ERIS)

The UK recently merged its R&D regimes into a single RDEC scheme, offering a 20% "above the line" credit on eligible R&D expenditure. For loss making SMEs with high R&D intensity, the ERIS provides a higher rate of payable tax credit

USA: Federal R&D Tax Credit

While USA does not offer a specific credit exclusively for SMEs, it does provide a unique benefit for "Qualified Small Businesses". These companies can utilise the R&D tax credit against payroll taxes, allowing them to monetise the credit in the short term, even without taxable income.

Refundability and cash flow support for small and medium-sized enterprises

One of the most critical aspects of incentives for SMEs is how they address cash flow challenges. Here's how the countries compare:

Australia and Canada lead in this aspect, offering fully refundable tax credits for SMEs. This approach provides immediate cash flow benefits, crucial for startups and small businesses investing heavily in R&D.

France offers immediate reimbursement of tax credits for SMEs with no ceiling, preserving cash flow and allowing quick reinvestment.

Germany's research allowance is paid out as part of the next initial assessment of income or corporate tax, providing direct financial relief for companies including in loss-making phases.

New Zealand offers refundability up to the sum of certain labour-related taxes, providing some cash flow relief. The ability to offset the credit against provisional tax liabilities also helps companies that cannot access the refundable benefit.

Singapore, while historically offering only tax deductions, has recently introduced a limited cash conversion option for up to SGD 100,000 of qualifying expenditure.

United Kingdom provides a payable credit through both the RDEC and ERIS regimes, benefiting loss-making businesses. However, the time lag between incurring expenditure and receiving the credit (up to 36 months) has been criticised as potentially detrimental to cash flow.

USA stands out as the only country in this comparison without a broadly applicable refundable R&D incentive for SMEs. However, the ability for Qualified Small Businesses to offset the credit against payroll taxes provides some cash flow benefit.

Incentive rates and caps for small and medium-sized enterprises

The generosity of R&D incentives varies significantly across these countries:

^{1 Refundable to the extent a company is in tax loss (and including the tax loss up to 48.5% otherwise 18.5% above the corporate tax rate.
2 There is no cap on the amount of credit generated but there is a cap on how much can be used to offset payroll tax on a tax return (up to USD500,000 per eligible year can be applied to be used for payroll offset; the remainder would be used against traditional income tax).
Australia and Singapore offer the highest potential rates, while New Zealand has a lower headline rate. However, it's important to note that the effective benefit can vary based on factors such as the tax system and additional incentives in each country.}

Eligibility and scope for small and medium-sized enterprises

The breadth of eligibility and scope of R&D activities covered by these incentives also differs:

Australia and Canada have broadly inclusive programmes based on activity eligibility rather than industry-specific criteria. This approach allows for a wide range of innovative activities across various sectors to qualify.

France offers a variety of incentives covering different aspects of R&D and innovation, including collaborative research and green industry investments. This multi-faceted approach provides support for various stages and types of R&D activities.

Germany's research allowance is open to companies regardless of industry and legal form. There are additional benefits for contract research.

New Zealand and Singapore have relatively broad eligibility criteria, focusing on activities that produce new or improved goods and services.

United Kingdom has moved towards a more inclusive approach with its merged RDEC scheme, although it maintains additional support for R&D-intensive loss-making SMEs through the ERIS.

USA stands out for its lack of SME-specific criteria in its main R&D tax credit programme, although individual states may offer more targeted incentives.

Additional support and complementary programmes for small and medium-sized enterprises

Several countries offer additional support mechanisms beyond their primary tax incentives:

Australia offers many Federal and State grant programmes, generally targeted to Government “priority areas”.

Canada provides over 500 different government grants and incentives covering various business activities, including R&D, training, and clean technologies.

France has specific programmes like the Young Innovative Company status, which provides tax and social insurance exemptions for qualifying SMEs.

New Zealand offers Ārohia Trailblazer Grants to support R&D companies in commercialising their innovations.

Singapore administers multiple grant programmes specifically targeting startups and SMEs, complementing its R&D tax incentive.

USA offers approximately 40 different state-specific credits to incentivise R&D activities within their jurisdictions. Additionally, there are numerous other state and local credits that, while not R&D-specific, are highly applicable to clients investing in R&D activities, such as job credits, energy credits, and credits on capital investments. 

Outlook for R&D tax incentives for small and medium-sized enterprises

Looking ahead, the landscape of R&D incentives for SMEs is likely to evolve in response to global economic trends, technological advancements, and emerging challenges. 

Increased focus on sustainability: 

As climate change concerns intensify, countries may shift their R&D incentives to prioritise clean energy, green technologies and sustainable innovations. France's Green Industry Investment Tax Credit (C3IV), which aims to ease the financial burden of the green transition, could be the first of many similar initiatives across other markets. Canada also has new Clean Energy credits ranging from 15% to 60% of capital spending on clean technology, clean electricity, carbon capture, clean technology manufacturing and clean hydrogen.

Digital transformation: 

With the rapid pace of digitalisation, incentives may increasingly target digital innovation, AI, and data-driven R&D. Canada's e-business and digital media credits in certain provinces are examples of this trend.

Global competitiveness: 

Countries may enhance their R&D incentives to maintain a competitive edge in attracting and retaining innovative SMEs. This could lead to more generous refundable credits or expanded eligibility criteria.

Streamlined processes: 

As seen in the United Kingdom's recent simplification of its R&D regime, there may be a trend towards streamlining incentive programmes to reduce administrative burdens on SMEs.

Sector-specific support:

While many countries currently offer broad-based R&D incentives, we may see a shift towards more targeted support for strategic industries or emerging technologies.

Collaboration emphasis: 

Incentives encouraging collaboration between SMEs, large corporations, and research institutions may become more prevalent, following France's model of offering higher credits for collaborative research.

The takeaway for small and medium-sized enterprises

The SME-focused incentives programmes across these eight nations reveals a diverse range of approaches, each with its strengths and unique features. Australia and Canada stand out for their generous, refundable incentives that directly address cash flow challenges. The UK and France offer a variety of targeted programmes, while Germany provides higher rates specifically for SMEs. New Zealand and Singapore, despite having smaller economies, offer competitive incentives with a focus on commercialisation and startup support.

USA presents a unique case, with its federal R&D credit being less SME-focused but offering specific benefits for qualified small businesses and a variety of state-level incentives. This decentralised approach allows for more targeted support at the local level but may result in a more complex landscape for businesses to navigate.

As global competition for innovation intensifies, these incentive programmes play a crucial role in supporting SMEs' growth. The trend towards refundable credits and immediate cash flow support reflects a growing recognition of the unique challenges faced by smaller businesses in funding innovation. Moving forward, policymakers may need to continually refine these programmes to ensure they effectively stimulate R&D investment while providing tangible benefits to the broader economy.