Everything you need to know about R&D intensive SMEs

  • By James Kennedy
    • Mar 22, 2023
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Loss-making SME are classed as R&D intensive if their qualifying research and development expenditure covers at least 40% of their total spend for expenditure on or after 1 April 2023, or 30% for expenditure on or after 1 April 2024.

Enhanced support for R&D intensive SMEs is vital because SMEs, even those that aren’t profitable, pay an enormous contribution to the UK economy, driving important advances in science and technology.

In this article, we explain what is meant by “R&D intensive SMEs” and outline how HMRC will now support eligible businesses.

Background to R&D intensive relief

In the UK’s 2023 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.”

Following the Spring Budget, 2023’s Autumn Statement announced a reduction in the threshold for a company to be considered an R&D Intensive SME. Previously set at 40% of qualifying R&D spend over total expenditure, it will now be lowered to 30% for spend on or after 1 April 2024.
The statement also confirmed that a new merged R&D scheme would be launched next year, leaving the R&D intensive SME scheme the only SME-specific scheme from 1 April 2024.

Find out more about the 2023 changes to R&D Tax Credits, and the 2023 Autumn Statement.

What is an R&D intensive SME?

HMRC provides enhanced support for SMEs that are loss-making and R&D intensive.

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.

From 1 April 2024, the intensity threshold will change, lowering from 40% to 30%. From this date there will also be a one-year grace period for companies failing to meet the intensity threshold due to any unforeseen circumstances, allowing them to continue claiming the benefit as long as they had met the intensity threshold and successfully claimed enhanced support in the year before.

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 for the accounting period on or after 1 April 2023 (or if your SME is profitable) can claim a 10% credit rate. After 1 April 2024, there will be a new single merged scheme for R&D Tax Relief where non-intensive SMEs can apply.

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 by reading our blog on R&D Tax Credits For SMEs.

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 currently 10%).

For all SMEs, the additional deduction rate is currently 86% on top of the normal 100% tax deduction for research and development, regardless of their R&D intensity. This may change from April 2024 when the new merged R&D scheme is launched (of which details are yet to be confirmed).

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.

Author

James Kennedy

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