HMRC has announced new relief measures for SMEs that are loss-making and R&D intensive. From 1 April 2023, eligible companies can claim £27 for every £100 of R&D investment. In this article, we explain what is meant by “R&D intensive” and outline how HMRC will now support eligible businesses.
Background to R&D intensive relief
Back in November, we shared our concern on the R&D Tax Credits rate cut as we felt that loss-making SMEs would be hit particularly hard by the new rules. SMEs, even those that aren’t profitable, pay an enormous contribution to the UK economy, driving important advances in science and technology. Cutting their tax relief would be a setback for these businesses, risking innovation and growth for the whole of the UK.
It seems that the Chancellor of the Exchequer has now come to the same conclusion. In the UK’s Spring Budget, Jeremy Hunt announced a new relief package for loss-making and R&D intensive SMEs. To explain why extra support was being offered to some R&D intensive SMEs, HMRC added that they “recognise the value of R&D intensive SMEs to the UK’s wider innovation ecosystem, and the particular difficulties such SMEs face when raising capital – for example, in their pre-revenue phase – to support innovation.”
Find out more about the 2023 changes to R&D Tax Credits.
What is an R&D intensive SME?
From 1 April 2023, HMRC will calculate R&D intensity as the proportion of an SME’s qualifying R&D expenditure compared to its total spending. SME’s will therefore be classed as R&D intensive if their qualifying R&D expenditure covers at least 40% of their total spending during a given financial period.
Loss-making SMEs that meet the R&D intensive threshold can claim R&D Tax Credits using the 14.5% credit rate for qualifying expenditure on or after 1 April 2023. Those that don’t meet the threshold (or if your SME is profitable) can claim with the new 10% credit rate.
Bear in mind that the intensity ratio will take into account any connected companies. If there are connected companies as defined by HMRC, total expenditure will be aggregated for calculating R&D intensity.
To be classed as an SME for R&D purposes, companies must also meet specific criteria such as having fewer than 500 employees, an annual turnover of less than €100 million, or a balance sheet of less than €86 million. Learn more about the SME R&D scheme.
What are the credit rates for SMEs from 1 April 2023?
For R&D intensive SMEs, the credit rate is 14.5% (the rate for non R&D intensive SMEs is 10%).
For all SMEs, the additional deduction rate is 86% on top of the normal 100% tax deduction for research and development, regardless of their R&D intensity.
What is the best way for SMEs to identify R&D expenditure?
Our expert team of technical consultants have field experience across a range of software, science and engineering industries. This means they’re uniquely able to identify your eligible R&D expenditure while ensuring your claim is fully compliant with HMRC rules. Speak to an expert today.
You can also learn more about eligible R&D spend by reading our article on what qualifies as R&D expenditure for claiming tax relief.
