R&D Tax Relief for Small and Medium-Sized Enterprises

If your small or medium-sized company invests in research and development, you may be able to claim generous tax relief on your costs. The rules changed significantly in April 2024, with older schemes closing and new ones opening, so it's important to understand which relief applies to your business and how much you could claim.

Understanding the scheme changes

R&D tax relief has undergone major reform. The scheme you can claim under depends on when your accounting period begins:

If your accounting period started before 1 April 2024, you claim under the old SME scheme, which allows you to deduct an extra 86% of your qualifying R&D costs from your trading profit (on top of the normal 100% deduction), giving a total deduction of 186%.

If your accounting period begins on or after 1 April 2024, you must claim under one of two new schemes: the merged R&D expenditure credit scheme (known as merged RDEC) or Enhanced R&D Intensive Support (ERIS). These schemes replaced the old SME and RDEC schemes entirely.

Who qualifies as an SME

To be considered a small or medium-sized enterprise for R&D purposes, your company must have:

• Fewer than 500 staff
• A turnover of under 100 million euros or a balance sheet total under 86 million euros

When calculating these figures, you must include the staff, turnover and balance sheets of any linked or partner companies.

Linked enterprises are those where one company holds over 50% of voting rights in another, has control rights over another company, or where both companies are controlled by the same party. You must include 100% of linked enterprises' figures in your totals.

Partner enterprises exist where another company holds 25% or more of your voting rights or capital, or vice versa. You include a proportion of partner enterprises' figures based on the ownership percentage. For example, if you own 30% of another enterprise, include 30% of its staff, turnover and balance sheet in your calculation.

The old SME scheme (accounting periods starting before 1 April 2024)

If you're claiming under the old SME scheme, you can deduct a total of 186% of qualifying R&D costs from your trading profit.

If your company makes a loss after claiming the relief, you can surrender that loss for a payable tax credit worth:

• 10% of the surrenderable loss, or
• 14.5% of the surrenderable loss if your company meets the "intensity condition" for expenditure on or after 1 April 2023

The intensity condition

The intensity condition is crucial for accessing higher rates of relief. It works differently depending on when your accounting period starts.

For accounting periods beginning before 1 April 2024 (but ending on or after 1 April 2023), you meet the intensity condition if your relevant R&D expenditure is at least 40% of your total expenditure, including that of any connected companies.

For accounting periods beginning on or after 1 April 2024, the threshold drops to 30% of total expenditure.

To calculate this, you need to compare your R&D costs against your total costs for the accounting period. You must also include the expenditure of any connected companies worldwide whose accounting periods overlap with yours.

Relevant R&D expenditure means costs on which R&D relief could be claimed, whether or not you actually make a claim. Total relevant expenditure includes costs brought into account under Generally Accepted Accounting Practice (GAAP) when calculating trading profits—essentially the costs that feed into profit before tax in your profit and loss account.

The merged RDEC scheme (accounting periods starting on or after 1 April 2024)

The merged RDEC scheme is available to any company that:

• Is trading
• Is liable to Corporation Tax
• Has a project that meets the definition of R&D

Under merged RDEC, you receive a taxable expenditure credit worth 20% of your qualifying R&D costs. Because this credit is taxable as trading income, the net benefit after Corporation Tax is lower than under the old SME scheme, but it's available to all companies regardless of size or profitability.

Enhanced R&D Intensive Support (ERIS)

ERIS is designed specifically for loss-making R&D intensive SMEs with accounting periods starting on or after 1 April 2024.

To claim ERIS, your company must:

• Meet the SME size criteria
• Make a trading loss for tax purposes (before the additional deduction)
• Meet the 30% intensity condition

ERIS provides the same enhanced deduction as the old SME scheme—an extra 86% deduction on top of the normal 100%, totalling 186%—plus a payable tax credit worth up to 14.5% of the surrenderable loss.

Even if you're eligible for ERIS, you can choose to claim under merged RDEC instead, but you cannot claim under both schemes for the same expenditure.

The PAYE cap

The tax credit you can receive is subject to a PAYE cap, unless you're exempt. The cap is £20,000 plus 300% of your company's PAYE and National Insurance contributions liabilities for the period.

If you're claiming under merged RDEC and your credit exceeds the PAYE cap, the excess is carried forward to the next accounting period. Under the old SME scheme or ERIS, the cap applies to the credit you can receive in that period.

Projects that don't qualify

You cannot claim R&D tax relief if your project:

• Is in the arts, humanities or social sciences (including economics)
• Has already received R&D relief, vaccines research relief or both totalling more than 7.5 million euros
• Has received any other State aid (excluding the SME tax relief)
• Is for work subcontracted to you
• Is subsidised in another way, such as by a grant (though you may be able to claim on the unsubsidised portion)

Next steps

If you're making your first R&D claim, you can apply for advance assurance—a voluntary scheme that, if accepted, guarantees your R&D claim will be accepted in line with what was discussed and agreed in your application.

Before claiming, check that you've completed all the necessary steps to ensure your claim is valid and properly structured for your circumstances.

Sources

• Research and Development tax relief for small and medium-sized enterprises
• Research and Development (R&D) tax relief: the merged R&D expenditure credit scheme and enhanced R&D intensive support

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.