SME R&D Tax Credits: Enhanced R&D Intensive Scheme
SME R&D Tax Credits: Enhanced R&D Intensive Scheme
If your business claims R&D tax credits under the SME scheme, there are two key things you need to be aware of – what the 2023 and 2024 rate changes mean for your upcoming claims, and how the cap on credits could affect you.
Why this is important for your business
The net amount of R&D tax credits that your business can receive under SME rates are nearly twice those that you can achieve under RDEC rates. If your business qualifies as an SME, it could receive a substantial cash flow advantage.
How the SME scheme works
R&D tax credits for SMEs doing R&D for their own purposes have been available for many years. Establishing whether your company qualifies as an SME for this purpose is assessed by tests related to EU definitions of employee numbers (up to 499), turnover (up to €100m) and balance sheet gross asset value (up to €86m) for the relevant period. Each of these tests must be applied to the group if your company is 51% owned by another company or under common control as another company. There are further tests for companies that have linkages between 25% and 50% with other corporates.
If your business receives external funding support e.g. government grants for the R&D work, or if R&D work is undertaken on behalf of another party, SME R&D relief is not available – although you may qualify for relief under the RDEC scheme in these circumstances. This external funding assessment is made on a project-by-project basis, so it is possible for SME companies to have different projects qualifying under the SME and RDEC rules.
The relief is given as a payable tax credit (a cash payment from HMRC), although where businesses were loss-making up to 31 March 2023, the credit could be surrendered for a higher cash credit. Since the credit was administered by direct payment, HMRC believed that the system was vulnerable to error and fraud. In response, the government made reductions in the rate of relief with effect from 1 April 2023 and then, as part of wider reforms, merged the SME scheme for profitable businesses with RDEC for accounting periods starting on or after 1 April 2024.
R&D relief for loss-making SMEs from 1 April 2023 onwardsReductions in rates of relief under the SME scheme in recent years have raised concerns over the support available to start-up businesses, so the government created a more beneficial scheme for ‘R&D Intensive’ loss-making SME businesses – known as the Enhanced R&D Intensive Scheme (ERIS).
For loss-making SMEs whose R&D expenditure constitutes at least 40% of their total expenditure, SME relief on costs incurred on or after 1 April 2023 can be claimed at 26.97% of allowable R&D expenditure, as these ‘R&D Intensive’ claimants are entitled to a higher rate of payable tax credit.
The ‘R&D Intensive’ rules have since been softened slightly, such that:
- The R&D ‘intensity’ threshold reduced from 40% to 30% of total expenditure for accounting periods beginning on or after 1 April 2024; and
- A one-year grace period will be applied if a company’s R&D intensity falls below 30%. This will aid companies whose R&D expenditure fluctuates year on year, who may otherwise end up switching between the intensive scheme and the main merged/RDEC scheme. This will result in greater certainty of the benefits available and consistency on where the R&D tax relief is reported in the company’s accounts.
How the cap on R&D tax credits for SMEs works
The amount of payable R&D tax credit that an SME can receive is capped at £20,000 plus 300% of its total Pay as you Earn (PAYE) and National Insurance Contributions (NIC) liability for all accounting periods beginning on or after 1 April 2021.
Your SME will be exempt from the cap if:- Your employees are creating, preparing to create, or managing Intellectual Property (IP) and
- You do not spend more than 15% of your qualifying R&D expenditure on subcontracting R&D to connected parties; or on the provision of externally provided workers (EPWs) by connected parties.
The introduction of a £20,000 de minimis has also added a layer of protection for genuine claims. By adding £20,000 to the total PAYE and class 1 NIC liability of claimants within the rules, the legislation ensures that SMEs making a claim for a payable credit of £20,000 or less will not lose out because of the cap.
And finally, companies will be allowed to include the PAYE and NIC liabilities for UK employees of connected parties that participate in the company’s R&D activities through either subcontracted R&D arrangements or through the provision of connected Externally Provided Workers (EPWs), when calculating the cap.
Protect your business from HMRC enquiry
HMRC has recently increased scrutiny on the R&D tax credit scheme, recruiting a significant number of R&D case workers to oversee enforcement activity and sending out ‘nudge’ letters to thousands of businesses. To avoid challenges, you need to be confident that your claim is right.
It is important to realise that the responsibility for R&D tax relief claims lies with you and your business. Even if you have paid advisers to prepare your claims to be submitted to HMRC, you will be liable for any incorrect or false claims and for (re)paying any tax reliefs and penalties.Our R&D & tax dispute teams have all the expertise to help you navigate the changing rules and protect your business from an HMRC enquiry. Our support includes preventative and remedial measures.
Get help with your R&D tax claims
Are you claiming the right tax reliefs? Could your business be missing an opportunity? Or are you concerned that you may be subject to an HMRC enquiry? Our team of R&D tax experts can help, whatever your query. Get in touch today.
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