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Claiming under the R&D intensive SME scheme

Following a long consultation, the R&D intensive SME scheme became law with the passage of the Finance Act 2024. Here, R&D expert Iain Butler shares everything you need to know about the scheme, including how it will operate and what impact it will have on your claim.

The UK government has pushed ahead to create a single R&D tax credit scheme for both SME and large companies. However, in a last-minute change of heart, the Chancellor reintroduced a more beneficial relief for loss making SMEs heavily involved in undertaking R&D in the UK. This scheme retains much of the old SME scheme benefits but the new rules for claimants are complex and many start-ups or scale up innovative businesses may find themselves excluded.

Initially both R&D intensive and non-intensive companies will receive the 86% enhanced deduction, but the changes come into play when the business is seeking to receive a cashback payment. Non-R&D intensive companies will be limited to a credit equal to 10% of the surrendered loss, and for period starting after 1 April 2024, these businesses will move into the merged scheme. This will cap the benefit at 18.6% initially and then dropping to 15% of qualifying spend. However, it was felt that this drop to the support versus 33% credit under the old SME scheme was too much for many innovative businesses investing heavily in R&D. Therefore, the R&D intensive scheme allows companies to surrender their R&D claim losses for a 14.5% credit. This retains the maximum benefit at 27%.

Iain Butler

+44 (0)20 7556 1343
butleri@buzzacott.co.uk
LinkedIn

Key changes brought in with the R&D intensive SME scheme:

Loss Making

R&D intensity calculation

The definition of R&D intensity is relatively straightforward by dividing the qualifying R&D claim expenditure by the total expenditure for the business. As long as this faction is greater than 40% initially or 30% for claims starting after 1 April 2024, a loss-making company can receive a higher rate for surrendered losses.

Within groups or businesses claiming for subsidised or subcontracted work, the calculation can become complicated. The intensity is calculated for the entire group, not just the claimant entity, and this can quickly increase the total losses such that the percentage drops below the R&D intensity limit.

Equally the qualifying expenditure relates solely to in-house development work and any claims under the RDEC or merged scheme are excluded from the calculation. Therefore, receiving a grant or undertaking subcontracted work could tip the company out of the R&D intensive scheme even where this funded work is R&D in nature.

Subcontracted costs

The R&D intensive scheme retains the old SME scheme rules to allow a claimant to include subcontracted costs. To prevent a double count of qualifying spend, the new scheme introduces an exclusion to prevent a company subcontracted to undertake R&D on behalf of another UK company from claiming under the new R&D schemes.

Overseas costs

As expected, the previously announced restrictions on overseas costs will be introduced from 1 April 2024. Any expenditure on R&D activities undertaken outside of the UK will no longer be claimable unless the expenditure falls within the boundaries of some strict exemptions where it’s not feasible to undertake the activities in the UK. Finding resources overseas for cost reasons or due to lack of resources in the UK pushing up wages is not sufficient to be able to claim for these costs.

We are happy to discuss the exemption to this restriction to see whether they fall within the new rules.

NIC/PAYE cap

The NIC/PAYE payable credit cap was brought in as an anti-abuse measure to prevent fraud and has been retained in the R&D intensive scheme. The R&D intensive scheme retains the cashback cap, where the R&D credit will be subject to a cap of £20,000, plus 300% of the SME’s overall liability for PAYE and NIC in the claim period.

What should you do?

With so many changes to the scheme, claimant companies will need to careful and invest time to avoid potential pitfalls within the new scheme. We encourage you to review your claims as soon as possible to identify where there might be overseas costs or subcontracted R&D complications. As the claim is now above the line, you should try to align the R&D claim work with accounting or audit activities such that the benefit can be accurately recognised.

If you’re concerned about how to transfer your claim into this new scheme, please get in touch.

How we can help

We're here to fully support you with preparing and claiming R&D tax credits. Should you choose to get specialist R&D support from Buzzacott, we will:

Identify what scheme your business qualifies for
Carry out a comprehensive review of your R&D activity, working with you to ensure you are maximising your claim
Prepare a claim that minimises your potential exposure to a HMRC enquiry
Aim to fast track your claim and avoid delays in receiving your benefit
Guide you through the whole claim process or on certain aspects of the claim.

We also work with you to assist in identifying other sources of R&D support and help with planning your R&D strategy, taking into account incentives and grants that might be available. By offering this holistic view of the innovation support needs, we can assist throughout the business lifecycle. Our R&D team at Buzzacott support businesses throughout the year, not just when it’s time to prepare the next R&D claim.

We take time to listen to your business to understand the goal you’re trying to achieve with your innovation, so we can help you overcome problems and challenges along the way. By being open and honest, we aren’t afraid to challenge our clients to make sure that your claim is correct and you’ve optimised the benefit. We want to help you understand your eligible activities, without holding you up, so you know how to build a robust R&D claim.

Get in touch

If you would like to speak to one of our R&D experts to find out more about how we can help, please get in touch via the form below or call +44 (0)20 7710 3330.