Government plans extra support for R&D intensive SME's

Government plans extra support for R&D intensive SME's

When the R&D tax credits rate cut was announced recently, the fear was that loss-making R&D intensive SMEs would be especially hard hit. Now, the government has announced measures to provide eligible companies with support that is designed to help ensure that innovation and development continues to flourish. So, what does the new R&D intensive support provide and what do you need to know about it?

What is R&D intensive relief?

It’s a relief package that was announced in the spring budget specifically for loss-making R&D intensive SMEs. Those companies that fall within the definition will be able to claim ￡27 for every ￡100 of R&D investment. This is relief that is only available to SMEs, which are defined by HMRC as those companies that have fewer than 500 employees, an annual turnover of €100 million, or a balance sheet of less than €86 million.

What makes a company R&D intensive?

The relief came into force on 1st April 2023 and from that point on, HMRC will calculate R&D intensity as the proportion of an SME’s qualifying R&D expenditure compared to its total spending. In order to fall within the R&D intensive definition, SMEs will need to ensure that qualifying R&D expenditure covers at least 40% of total spend during the particular financial period. Where this is the case, those companies that fall within the right thresholds will be able to claim R&D tax credits using the 14.5% credit rate for qualifying expenditure. If an SME is profitable, or the threshold is not met, then the new 10% rate will apply. It’s important to note that the intensity ratio that is used in this process doesn’t just apply to a single company but also to any connected companies.

Why is this such good news for SMEs?

It’s designed to take the sting out of the changes made to R&D tax credits that made them less appealing - and which are likely to hit any loss-making SMEs especially hard. Many innovative businesses have come to rely on R&D tax credits for reliable annual income to help fuel ongoing innovation. There are many benefits to opting for R&D tax credits over something else like a loan or investment, including that there is no need to pay the amount back and no equity is lost. What the R&D intensive changes do is recognise the impact of the new landscape for R&D tax credits and help to ease the challenges for those that are most affected.

What’s the most important part of R&D intensive claims?

Identifying eligible R&D expenditure. This is going to become even more vital for any company that is looking to make an R&D-intensive claim that is fully compliant with HMRC.

Through the new R&D intensive relief, the government is providing additional relief for those SMEs likely to be particularly challenged by R&D tax credits changes - with a view to continuing to support innovation in the British economy.