The generosity of the SME scheme witnessed a decline in April 2023, and the merging of the schemes in April 2024 will pose additional challenges for SMEs. However, amidst these changes, a silver lining exists for loss-making R&D-intensive SMEs.
In the spring of 2023, the government announced the introduction of a higher rate of relief specifically for loss-making R&D-intensive SMEs. Moreover, the chancellor provided further details on how tax relief will be implemented for these SMEs when the scheme merges in April 2024.
This article explores the implications and opportunities for R&D-intensive SMEs in light of these developments.
A loss-making R&D-intensive SME is currently a company with qualifying R&D expenditure that makes up at least 40% of its total expenditure.
However, after review, the government recognised that the threshold was too high. In the Autumn Statement of November 2023, they announced that starting from April 2024, an R&D-intensive SME would be a company with a qualifying R&D expenditure of at least 30% of its total expenditure.
This adjustment expands eligibility, allowing around 5,000 SMEs to qualify for enhanced support if a significant portion of their expenditure is dedicated to research and development. In essence, an R&D-intensive SME is a company that prioritizes and invests heavily in R&D activities.
Also, to be classified as an SME for R&D purposes, you must meet HMRC’s criteria:
To learn more about the scheme, read our guide on SME R&D Tax Credits.
Starting from 1 April 2023, HMRC will evaluate the R&D intensity of SMEs by comparing their qualifying R&D expenditure with their overall spending. An SME will be considered R&D-intensive if their qualifying R&D expenditure accounts for at least 40% of their total spending during a specific financial period.
Effective from 1 April 2024, the intensity threshold will be lowered from 40% to 30%. Companies that fail to meet the intensity threshold due to unforeseen circumstances will also be granted a one-year grace period. This provision allows them to claim the benefit if they had met the threshold and successfully received enhanced support in the previous year.
Please note that the intensity ratio will consider any affiliated companies. If these companies are connected according to HMRC’s definition, the total expenditure will be combined to calculate the R&D intensity.
A loss-making R&D-intensive SME is able to claim a higher payable R&D tax credit rate of 14.5% (rather than the reduced 10%). However, the enhancement rate remains at the same level as the SME scheme, 86%.
This means that loss-making R&D-intensive SMEs will receive a cash credit of £27 for every £100 spent on R&D expenditure instead of the reduced rate of £18.60 available to non-R&D-intensive SMEs.
R&D expenditure = £200,000
R&D enhancement rate: £200,000 x 186% = £372,000
Credit: £372,000 x 14.5% = £53,940
£53,940 paid out as credit from HMRC. 26.97% of your R&D expenditure.
At EmpowerRD, we bring together R&D specialists and an intuitive platform to generate compliant and optimised claims. A crucial aspect of this process is the identification of R&D expenses. If you believe your business qualifies as an R&D-intensive SME, our platform and service approach can assist you in determining the specific scheme you can claim under and whether you meet the criteria for being R&D-intensive.