R&D for SMEs - what you need to know
R&D for SMEs - what you need to know
If your business claims R&D tax credits on the SME scheme, there are two key things you need to be aware of – what the 2023 and 2024 rate changes mean for your upcoming claims, and how the cap on credits could affect you.
HMRC has recently dialled up scrutiny on the R&D tax credit scheme, sending out ‘nudge’ letters to thousands of businesses. To avoid challenges, you need to be confident that your claim is right.
Watch the webinar: The cost of getting your R&D tax claim wrong
R&D tax relief rates for 2023
Rates of R&D tax relief available on costs incurred from 1 April 2023 are:
|
|
SME regime |
|
|---|---|---|
|
|
Up to |
From |
|
Profitable |
130% uplift on costs = |
86% uplift on costs = |
|
Loss making |
Costs plus 130% uplift = 230 x 14.5% repayable credit = |
Costs plus 86% uplift = 186 x 10% repayable credit = 18.6% subsidy |
|
Loss making R&D intensive company** |
NA |
Costs plus 86% uplift = 186 x 14.5% repayable credit = 26.97% subsidy |
*See details of further changes from 1 April 2024 here.
If you don’t have a year-end date of 31 March, you will also need to do a split period calculation for R&D costs to ensure you apply the correct rates of relief. In some cases, where apportioning costs is challenging, HMRC may accept a blended rate of relief for a period that straddles a rate change, if it doesn’t materially impact your claims. There have been other technical and administrative changes to the SME R&D scheme – read more about these here. In particular, details of the claim process including the need for an Additional Information Form from August 2023.
How does the cap on R&D tax credits for SMEs work?
The amount of payable R&D tax credit that an SME can receive is capped at £20,000 plus 300% of its total Pay as you Earn (PAYE) and National Insurance Contributions (NIC) liability for the period.
Your SME will be exempt from the cap if:
- Your employees are creating, preparing to create, or managing Intellectual Property (IP) and
- You do not spend more than 15% of its qualifying R&D expenditure on subcontracting R&D to connected parties; or on the provision of externally provided workers (EPWs) by connected parties.
It is worth noting that the above is apportioned where relevant for periods more or less than 12 months.
The introduction of a £20,000 de minimis has also added a layer of protection for genuine claims. By adding £20,000 to the total PAYE and class 1 NIC liability of claimants within the rules, the legislation ensures that SMEs making a claim for a payable credit of £20,000 or less will not lose out because of the cap.
And finally, with the inclusion of Connected Parties - companies will be allowed to include the PAYE and NIC liabilities for UK employees of connected parties that participate in the company’s R&D activities through either subcontracted R&D arrangements or through the provision of connected Externally Provided Workers (EPWs), when calculating the cap.
Why is there a cap on SME R&D tax credits?
When, in 2012, the cap on credits was abolished along with the minimum spend threshold of £10,000, HMRC saw a boom in the number of SMEs claiming, and the amount of payable R&D credits increased to reach £2.2 billion in 2018.
Even though the scheme was clearly effective, HMRC began to tackle a growing number of fraudulent claims for payable tax credits on R&D work carried out overseas. This fraud totalled more than £300 million and, as a result, a reintroduction of the cap was proposed in the 2018 budget.
Protect your business from HMRC enquiry
It is important to realise that the responsibility for R&D tax relief claims lies with you and your business. Even if you have paid advisers to prepare your claims to be submitted to HMRC, you will be liable for any incorrect or false claims and for (re)paying any tax reliefs and penalties.
Our R&D & tax dispute team have all the expertise to help you navigate the changing rules and protect your business from an HMRC enquiry. Our support includes preventative and remedial measures.
