How does the profitability of a business affect its position with R&D tax relief claims?

Prior to the introduction of the Merged Scheme for R&D in 2024, the size and profitability of a business had major ramifications for the way in which R&D tax reliefs were engaged with.

Even though the Merged Scheme cuts out a lot of the confusion, there are still some key factors of R&D tax relief that are impacted by the profitability of a business.

For accountants looking to help clients with R&D, it is worth understanding how this works and what the best approach for relief is.

Profitable SMEs

For SMEs that are making a profit, R&D tax reliefs work to effectively shield some of that profit from tax, meaning that the business has more money to invest in future projects.

The R&D tax relief can be claimed on the full range of eligible expenditure that the business generates during the project.

A further 86 per cent of qualifying costs can be deducted from the annual profits.

If you imagine a business with a credit rate of up to 21.5 per cent spending £500,000 on R&D, the return could potentially be as much as £107,500.

Loss-making SMEs

Historically, loss-making SMEs have benefitted the most from the R&D tax relief scheme.

While the merged scheme has reduced the extent to which this is the case, there is still considerable value in loss-making SMEs making the most of R&D tax reliefs.

The R&D tax relief incentive for loss-making SMEs is up to 18.6 per cent, meaning that a company could spend £500,000 on R&D and receive up to £93,000 in return.

R&D intensive loss-making SMEs

If an SME is loss-making and R&D intensive, it is able to have a different treatment for R&D tax reliefs.

These claims will be managed through the ERIS Scheme and are the most generous of the available avenues.

The ERIS Scheme carries a 27 per cent tax credit, so a spend of £500,000 would yield up to £135,000 in return.

For a business to be considered R&D intensive, at least 30 per cent of its total expenditure must be on R&D.

There is a grace period of 12 months for this, allowing a business to dip below that threshold for a year without losing access to ERIS.

Any prolonged period of reduced R&D spend will see the business become viewed as a regular loss-making SME and treated accordingly.

How to help my client with R&D based on their profitability?

As an accountant, you are well-placed to understand the profitability of your clients and review where their funds are spent.

It may be that you can help a client maintain their R&D intensive status if they are at risk of slipping below the ERIS threshold by encouraging them to commit the required amount to R&D work.

However, having an R&D tax consultant support you allows you to offer R&D assistance with confidence.

Our team can work with you to understand the unique position of your clients, discovering the extent of their qualifying expenditure and how this can be best represented in an R&D tax relief claim.

Both profitable and loss-making SMEs would appreciate the full scope of funding that comes from R&D tax relief claims.

We are experts at reviewing qualifying expenditure and ensuring that nothing is missed, maximising the claims for our clients.

For those using the ERIS Scheme, we can advise on effective ways to evidence R&D expenditure to solidify the claim and protect from HMRC enquiry.

Get in touch for R&D tax relief support that is tailored to the profitability of your clients.

Adam Bointon

Adam Bointon is a Technical Director specialising in R&D Tax Credits for SMEs in manufacturing and software sectors. With over 15 years’ experience, he works closely with businesses to identify qualifying R&D activities and prepare clear, compliant claims. He combines technical expertise with a strong understanding of economics and finance to support successful outcomes. Adam also contributes to industry webinars and CPD sessions, sharing insights on R&D tax relief and HMRC requirements.