Enhanced support for Research & Development (R&D) intensive small or medium enterprises (SMEs)
Updated 23 November 2023
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Who is likely to be affected
Loss-making small or medium enterprises (SMEs) whose research and development (R&D) expenditure constitutes at least 40% (for expenditure incurred on or after 1 April 2023) or 30% (for accounting periods beginning on or after 1 April 2024) of total expenditure, referred to as ‘R&D intensive SMEs’.
General description of the measure
This measure implements the enhanced support for R&D intensive SMEs that was announced at Spring Budget 2023, providing a higher rate of payable tax credit for eligible SMEs. Loss-making companies claiming the existing SME tax relief will be eligible for a higher payable credit rate of 14.5% if they meet the definition for R&D intensity.
A company is considered R&D intensive where its qualifying R&D expenditure is 40% or more of its total expenditure (hereafter referred to as the ‘intensity threshold’). Companies meeting this intensity threshold will be able to claim the enhanced support as part of their claim under the SME scheme payable credit, using the higher rate of credit for any expenditure incurred on or after 1 April 2023. Profit-making SMEs and non-R&D intensive loss-makers will, for accounting periods beginning on or after 1 April 2024, instead be entitled to the new merged R&D scheme.
For accounting periods beginning on or after 1 April 2024, the intensity threshold will be reduced from 40% to 30%. A loss-making SME company with qualifying R&D expenditure of 30% or more of its total expenditure will be able to claim the enhanced support for any accounting period beginning on or after that that date.
There will be a one-year grace period that allows a company which fails to meet the intensity threshold, for example due to a one-off shock (such as exceptional items of expenditure) or small fluctuations in expenditure (for companies close to the threshold), to continue claiming the enhanced support in that year if it met the intensity threshold and successfully claimed enhanced support in the previous year. The one-year grace period will apply to accounting periods beginning on or after 1 April 2024.
Policy objective
The government recognises the important role that R&D plays in driving innovation and economic growth as well as the benefits it can bring for society.
It also recognises the value of R&D intensive SMEs to the UK’s wider innovation ecosystem, and the particular difficulties such SMEs face when raising capital, for example, in their pre-revenue phase, to support innovation.
These changes are a key part of the Chancellor’s plan to get the economy growing and make the UK the best place in the world to start and grow a business. By providing enhanced support to R&D intensive SMEs, as well as reforming the wider R&D tax reliefs system, the government is promoting the conditions for enterprise to succeed.
Background to the measure
At Autumn Statement 2022, as part of the review into the R&D tax reliefs, the Chancellor committed to considering the case for further support for R&D intensive SMEs.
Following engagement with industry, at Spring Budget 2023 the Chancellor announced enhanced support for R&D intensive SMEs, applying from 1 April 2023 and worth around £500 million per year. This is targeted specifically at loss-making R&D intensive SMEs, focusing support on those most impacted by the rate changes introduced at Autumn Statement 2022.
On 18 July 2023, the government published draft legislation setting out the proposed design of the support for technical consultation.
Following the technical consultation, at Autumn Statement 2023 the Chancellor announced a one-year grace period that allows a company which fails to meet the intensity threshold to continue to claim enhanced support in that year if it met the threshold and successfully claimed enhanced support in the previous year.
At Autumn Statement 2023, the Chancellor also announced the intensity threshold will be reduced from 1 April 2024. Companies with a qualifying R&D expenditure of 30% or more of its total expenditure will be eligible for the enhanced support. This will provide £50m of support per year by 2028-29, to approximately 5,000 extra SMEs, who will become eligible for this support.
The government will continue working with industry to develop the enhanced support for R&D intensive SMEs, and consider further simplifications.
Detailed proposal
Operative date
The measure will take effect from 1 April 2023, with eligible companies able to claim for expenditure incurred on or after 1 April 2023, upon Royal Assent to Autumn Finance Bill 2023. The reduction in the intensity threshold to 30% and the one-year grace period will apply to accounting periods beginning on or after 1 April 2024.
Current law
Current law on the R&D tax relief rates for SMEs is contained in Chapter 2 of Part 13 of Corporation Tax Act (CTA) 2009.
Proposed revisions
Legislation will be introduced in Autumn Finance Bill 2023 amending sections 1039, 1043,1044 and 1045 (relief for SMEs on the cost of R&D) of CTA 2009 to provide the higher rate of payable credit for R&D intensive SMEs, to define R&D intensive SMEs and provide for a one-year grace period.
A new condition will be added at section 1045 to determine whether a company meets the R&D intensity threshold in an accounting period for the purposes of sections 1044 and 1045. A company meets the condition if its relevant R&D expenditure for the accounting period amounts to at least 40% of its total relevant expenditure for the accounting period. The intensity threshold will reduce to 30% from 1 April 2024.
Autumn Finance Bill 2023 also provides for a one-year grace period. The grace period will allow a company which fails to meet the intensity threshold, for example due to a one-off shock (such as exceptional items of expenditure) or small fluctuations in expenditure (for companies close to the threshold), to continue claiming enhanced support in that year if it met the threshold and successfully claimed enhanced support in the previous year. It will apply to accounting periods beginning on or after 1 April 2024.
Summary of impacts
Exchequer impact (£ million)
| 2023 to 2024 | 2024 to 2025 | 2025 to 2026 | 2026 to 2027 | 2027 to 2028 | 2028 to 2029 | |
|---|---|---|---|---|---|---|
| Enhanced support for R&D intensive SMEs: lowering intensity threshold to 30% and introducing grace period | Negligible | +15 | -15 | -70 | -80 | -75 |
These figures are set out in Table 5.1 of Autumn Statement 2023 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2023.
The costings for the R&D intensive scheme as announced at Spring Budget 2023, were certified by the Office for Budget Responsibility, and set out in Table 4.1 of Spring Budget 2023
Economic impact
This measure is not expected to have any significant macroeconomic impact.
Adjustments were made to take account of behavioural effects, including businesses adjusting their R&D expenditure in response to the measure.
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 groups of people sharing protected characteristics.
Impact on business including civil society organisations
This measure is expected to have a positive impact on loss-making R&D intensive SMEs who will be eligible for a higher payable credit rate of 14.5%. Eligible loss-making companies will be able to claim £27 from HMRC for every £100 of R&D investment. From 1 April 2024, the intensity threshold will be reduced to 30%, which is expected to benefit approximately 5,000 SMEs who will become eligible for the relief.
One-off costs are expected to be negligible and could include familiarisation with the changes and updating systems to reflect them. There is expected to be some continuing costs, including for the approximately 39,000 SME loss-makers that will be required to check their eligibility for the intensive scheme, and of those, up to 23,000 that are expected to meet the intensity threshold and will be required to provide more information when submitting a claim.
The measure is not expected to impact on civil society organisations.
Estimates of the costs are shown in the tables below:
Estimated one-off impact on businesses (£ million)
| One-off impact | £ million |
|---|---|
| Costs | negligible |
| Savings | — |
Estimated continuing impact on administrative burden (£ million)
| Continuing average annual impact | £ million |
|---|---|
| Costs | 0.6 |
| Savings | — |
| Net impact on annual administrative burden | 0.6 |
Operational impact (£ million) (HMRC or other)
The estimated operational costs for HMRC are in the region of £5.7m.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through information collected from claims and claim notifications.
The current R&D reliefs have been subject to periodic econometric evaluation, providing a good baseline for future evaluations. HMRC are collecting more information which enables HMRC to better monitor the reliefs through, for example, clearer data on what is being claimed.
Consideration will be given to evaluating the policy after sufficient years of monitoring data from claims and claims notifications have been collected and analysed, as part of HMRC’s ongoing programme of tax relief evaluation.
Further advice
If you have any questions about this change, please contact HMRC R&D Policy Team on email: rdtaxreliefdraftguidance2022@hmrc.gov.uk.