Research and Development tax relief for small and medium-sized enterprises
Find out about Corporation Tax relief you can claim for costs on R&D if you’re a small and medium-sized enterprise with an accounting period that starts before 1 April 2024.
There may be other steps you must complete before working out which relief you can claim. Check the steps you need to take to correctly claim R&D tax relief.
What the relief is
Research and Development (R&D) tax relief is available for small and medium-sized enterprises (SMEs) with an accounting period that starts before 1 April 2024.
If your accounting period begins on or after 1 April 2024, you can claim under the Research and Development merged scheme or the Enhanced R&D intensive support ERIS.
The R&D tax relief for small and medium-sized enterprises allows your company to:
- deduct an extra 86% of your qualifying costs from your trading profit for tax purposes, as well as the normal 100% deduction, to make a total of 186% deduction
- claim a payable tax credit if the company has claimed relief and made a loss
The payable tax credit is worth up to:
- 10% of the surrenderable loss
- 14.5% of the surrenderable loss if the company meets the intensity condition for expenditure on or after 1 April 2023 (read how to meet the intensity condition section of this guide)
If you’re making your first claim, you may be able to apply for advance assurance. This is a voluntary scheme you can use as a guarantee (if your application is accepted) that any R&D claim for tax relief will be accepted in line with what was discussed and agreed in your application.
Projects that do not qualify
You cannot claim this tax relief for a project if:
- it’s in the arts, humanities or social sciences (including economics)
- you’ve received R&D relief, vaccines research relief or both, totalling more than 7.5 million euros for it
- you’ve received any other State aid (excluding the SME tax relief) for it
- it’s for work subcontracted to you
- it’s subsidised in some other way, for example by a grant, but you may be able to claim on the part that is not subsidised
Find out if you can claim R&D expenditure credit instead.
Who can claim
To claim R&D tax relief for small and medium-sized enterprises, your company must have:
- less than 500 staff
- a turnover of under 100 million euros or a balance sheet total under 86 million euros
- an accounting period beginning before 1 April 2024
You must include the staff, turnover and balance sheets of any linked or partner companies in your total when you work out if you can claim R&D tax relief for SMEs.
Linked enterprises
Your company is linked to another one if:
- it holds over 50% of the voting rights in another enterprise
- another enterprise holds over 50% of the voting rights in your company
- it has other rights which allow it to control another enterprise
- another company has other rights which allow it to control your company
- your company and another enterprise are both controlled by another party
You must include all the staff, turnover and balance sheets of linked enterprises when calculating if you are a SME.
Partner enterprises
You have a partner enterprise if:
- another company holds 25% or more of your voting rights or capital
- you hold 25% or more of another enterprise’s voting rights or capital
You’ll need to include a proportion of the staff, turnover and balance sheets of partner enterprises. This should be based on the percentage of voting rights and capital that connects the enterprises.
For example, if you own 30% of another enterprise you should include 30% of its staff, turnover and balance sheets when calculating if you’re a SME.
How to meet the intensity condition
A company meets the intensity condition if:
- it’s claiming for an accounting period beginning before 1 April 2024 and ending on or after 1 April 2023
- its relevant R&D expenditure is at least 40% of its total expenditure (including that of any connected companies)
You will need to meet the condition for the period for which the claim is made.
The periods you need to consider are:
- the accounting period for which the claim is made
- any periods of account of connected persons (worldwide) which overlap with the claimant’s accounting period
You’ll need to identify the costs that relate to the periods under consideration. For accounting periods aligned with the accounting period of the claimant, use the exact figures for that accounting period.
You must use a reasonable method to allocate costs of the connected company to the period of time covered by the accounting period of the claimant company where either:
- there is a mismatch of accounting periods between the claimant and one or more connected company
- a connected company is overseas (and so has no accounting period for UK tax purposes)
In certain circumstances it may be appropriate to split costs on a time (day) basis. In other cases it will be necessary to consider when costs were incurred to give a fair result, for example, where R&D expenditure is incurred unevenly through a period. Any basis you choose should be used consistently and you should be able to explain effectively why you’ve used it.
Relevant R&D expenditure means costs on which R&D relief could be claimed for the period, whether or not a claim is actually made. Generally, it must also form part of the total relevant costs.
Total relevant expenditure includes:
- costs that are brought into account under Generally accepted accounting practice (GAAP) in calculating the profits of a trade — if your accounts are prepared correctly under GAAP, this will be costs that feed into the profit before tax in your profit and loss account or income statement
- any pre-trading costs on which relief would be available under s1045 CTA 2009 SME scheme
- any amounts deducted in the tax computation under s1308 CTA 2009 Conditions to be satisfied — allowable as a deduction in computing the profit
It does not include:
- any amount of amortisation added back in the tax computation under s1308 CTA 2009 Conditions to be satisfied — allowable as a deduction in computing the profit
- any costs which consist of a payment, or other transfer of value, to another connected company
If your credit exceeds the PAYE cap
The tax credit you receive in the accounting period cannot exceed the PAYE cap, unless you’re exempt from the cap.
The PAYE cap amount is £20,000 plus 300% of the company’s relevant PAYE and National Insurance contributions liabilities.
For more information, read HMRC manual CIRD90600 — tax credit and PAYE cap.
What you need to do next
If your company and project are eligible to claim R&D tax relief for small and medium-sized enterprises, you can apply for advance assurance to find out if your claim will be accepted.
You must also check if you need to tell HMRC that you’re planning to claim this relief.