R&D Intensive SMEs
Overview 📘
From April 2023, HMRC reduced the SME R&D payable tax credit rate from 14.5% to 10%, alongside lowering the enhancement rate from 130% to 86%.
These combined changes have significantly reduced the cash benefit available to loss-making SMEs, particularly early-stage, R&D-focused businesses that rely on the credit as a vital source of funding.
To offset this impact, the government introduced a new measure for R&D intensive SMEs, allowing qualifying companies to continue receiving the higher 14.5% credit rate.
💡 The Relief
If your company meets the criteria for being R&D intensive, you can continue to claim the 14.5% payable credit rate, instead of the reduced 10% rate.
This means the most innovation-heavy companies can still access enhanced support despite the wider reduction in SME R&D relief.
🔍 What Is an R&D Intensive Company?
A company qualifies as R&D intensive if its R&D expenditure accounts for a significant proportion of its total expenditure during the accounting period.
📊 The R&D Intensity Test
| Accounting Period | R&D Expenditure as a % of Total Expenditure | Loss Making Prior to R&D Tax Claim | Qualifies for Relief? |
|---|---|---|---|
| Before April 2024 | More than 40% of total expenditure | Not Relevant | ✅ Yes |
| From April 2024 onwards | More than 30% of total expenditure | Yes | ✅ Yes |
In other words, if at least 30–40% of your total company spend is on qualifying R&D activity, you may continue to claim at the 14.5% payable rate.
🧩 How to Calculate R&D Intensity
To determine whether your company meets the R&D intensity threshold, HMRC uses the following formula:
R&D Intensity % = Qualifying R&D Expenditure \ Total Expenditure
Key Definitions
Qualifying R&D Expenditure
- Includes R&D costs claimed under both the SME and RDEC schemes.
Total Expenditure
Based on total profit and loss (P&L) expenses for the period.
Adjust by:
- Adding back any s1308 expenditure.
- Subtracting non-deductible costs for Corporation Tax (e.g. depreciation).
Connected Companies
- If your business is part of a group or connected company structure, R&D and total expenditure figures must be aggregated when assessing the intensity ratio.
💡 Practical Example
Imagine your company spent:
- £600,000 in total during the year; and
- £240,000 of that was on qualifying R&D activities.
R&D Intensity = £240,000 \ £600,000 = 40%
✅ Your company would meet the intensity threshold and qualify for the higher 14.5% payable tax credit.
✅ Summary
| Criteria | Detail |
|---|---|
| Payable credit rate | 14.5% (for qualifying R&D intensive SMEs) |
| Standard SME rate | 10% |
| R&D intensity threshold | >40% (before April 2024), >30% (from April 2024) |
| Qualifying expenditure | Includes SME and RDEC R&D spend |
| Total expenditure | Based on P&L expenses, adjusted for s1308 and non-deductible costs |
| Connected companies | Aggregated for ratio calculation |