How do you know when a business is R&D intensive and why does it matter?

There is a clear difference between a business that conducts R&D and a business that is R&D intensive.

This distinction used to be more important for SMEs under the old scheme, where both loss-making and break-even businesses received different recovery rates depending on R&D intensiveness.

Given that R&D intensiveness can be questioned during an enquiry, it is important to understand how and when a business qualifies for the distinction.

What makes a business R&D intensive?

A business is determined to be R&D intensive when its R&D expenditure crosses a certain threshold.

There may be some confusion around where the threshold is for R&D intensive businesses, given that it changed recently.

For expenditure incurred on or after 1 April 2023, the threshold was set at 40 per cent of total expenditure.

This threshold was dropped to 30 per cent for accounting periods beginning on or after 1 April 2024, so it will soon be the only rate that matters.

As with other figures that are apportioned during the creation of an R&D tax relief claim, HMRC can question how the amount of expenditure has been calculated.

While correctly apportioning costs is always important, any miscalculations of qualifying direct or indirect costs could cause a business to be wrongly considered R&D intensive or incorrectly left out.

As such, accountants should review their clients’ figures carefully and determine the total R&D expenditure, seeking guidance from R&D tax consultants when needed to ensure the accuracy of figures.

Does being R&D intensive matter for businesses?

Oddly, it matters less than you might imagine.

Being R&D intensive is only of real significance for loss-making SMEs, as this will grant them access to the ERIS scheme that has a higher rate of recovery than the standard Merged Scheme.

The increased value is significant, so it is worth it for R&D intensive loss-making SMEs to make the most of what is available to them.

For other businesses, having an understanding of their R&D expenditure is useful for knowing the value of R&D tax relief claims.

We help accountants and businesses understand the value of R&D tax relief so that more companies can fund innovation. To discover how to get the most out of R&D tax relief claims, speak to our team today!

Adam Bointon