R&D Intensive SMEs

From April 2023, the payable tax credit rate for SMEs is reducing from 14.5% to 10%. When combined with the enhancement rate decreasing from 130% to 86%, this is a huge reduction in the cash tax credit available.

It is clear that this will have a large impact on companies that are heavily focussed on R&D and have historically been reliant on R&D tax credits in their early years of pre-revenue R&D. The government has recognised the detrimental and anti-innovation effect the reduction in the payable tax credit will have and has therefore introduced a relief for R&D intensive SMEs

The relief

Companies that qualify for the conditions of the relief will be eligible to receive a payable tax credit at the 14.5% rate, rather than the new 10% rate.

What is an R&D intensive company?

To be eligible for the relief, companies must meet the new R&D intensity definition which is based on a ratio between the company's total expenditure and the company's qualifying R&D expenditure (both over the same period). If the R&D expenditure is >40% of the total expenditure, then the company will qualify for the relief. The threshold drops to >30% of the total expenditure for accounting periods starting on or after April 2024.

Obviously, there are some further points to understand:

• Qualifying expenditure includes R&D expenditure under both the SME and the RDEC scheme.
• Total expenditure is the total expenses per your P&L, adjusted by adding any s1308 expenditure and subtracting any amount not deductible for CT purposes (e.g. depreciation).
• Connected companies should be aggregated together when determining the ratio.