Technical correction to intensity ratio definition in Research and Development small or medium-sized enterprises rules
Published 30 October 2024
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Who is likely to be affected
Small or medium-sized enterprises that have a high Research and Development (R&D) intensity (40% or above of their expenditure is on R&D) and claim the enhanced rate of small or medium-sized enterprise payable R&D tax credit for expenditure incurred from 1 April 2023 in an accounting period that began before 1 April 2024.
General description of the measure
This measure amends legislation in Schedule 1 to the Finance Act 2024 to include all relevant R&D expenditure incurred on or after 1 April 2023 in the calculation of the R&D intensity condition.
Policy objective
The change ensures that all companies that were originally intended to benefit from the enhanced relief will be able to do so.
Background to the measure
At Spring Budget 2023 the then Chancellor announced enhanced support for R&D intensive small or medium-sized enterprises, applying from 1 April 2023. The original details were set out in a technical note about additional tax relief for Research and Development intensive small and medium enterprise which stated that the relief would be available where R&D intensity, the ratio of qualifying R&D expenditure to total expenditure in a period, was 40% or more. Further changes were announced at Autumn Statement 2023.
Legislation was introduced in the Finance Act 2024. In this legislation, the R&D intensity calculation does not take account of any expenditure of the company for which it is entitled to Research and Development Expenditure Credit. It was always intended that this expenditure should be included.
Detailed proposal
Operative date
This measure will be retrospective and take effect from 1 April 2023.
Current law
Current law on the R&D tax relief rates for small or medium-sized enterprises is contained in Chapter 2 of Part 13 of Corporation Tax Act 2009.
Proposed revisions
Paragraph 21 of Schedule 1 to Finance Act 2024 will be amended so that subsection 7 of section 1045ZA of Corporation Tax Act 2009 is to be read as also including expenditure qualifying for Research and Development expenditure credit.
Summary of impacts
Exchequer impact (£ million)
| 2024 to 2025 | 2025 to 2026 | 2026 to 2027 | 2027 to 2028 | 2028 to 2029 | 2029 to 2030 |
|---|---|---|---|---|---|
| Negligible | Negligible | Negligible | Negligible | Negligible | Negligible |
This measure is expected to have a negligible impact on the Exchequer.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
There is expected to be no impact on individuals as this measure only affects businesses. There is not expected to be an impact on family formation, stability or breakdown.
Equalities impacts
It is not anticipated that there will be impacts on those in groups sharing protected characteristics.
A full equality impact assessment is not recommended.
Impact on business including civil society organisations
This measure will have negligible impact on businesses that may be affected because the amended legislation will allow those businesses to claim as intended.
One-off costs could include familiarisation with the changes. There are not expected to be any further one-off or continuing costs.
Customer experience is expected to remain broadly the same as the technical change does not alter how businesses would interact with HMRC.
This measure is not expected to impact civil society organisations.
Operational impact (£ million) (HMRC or other)
It is not anticipated there will be any additional HMRC operational and delivery impacts as a result of this change.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The R&D tax reliefs are monitored through information collected from claims and claim notifications.
Further advice
If you have any questions about this change, please contact R&D policy team by email at randd.policy@hmrc.gov.uk.