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Which R&D tax relief scheme should your client claim under?

Author: Tom Mason

Since the merging of the SME and R&D Expenditure Credit (RDEC) schemes in April 2024, two R&D tax relief schemes are available to businesses undertaking qualifying innovative work – the merged scheme and the SME intensive scheme.

For larger clients that make a profit on their innovations, this distinction is fairly clear-cut.

However, your SME clients may not be clear on which scheme under which they are entitled to claim, as it depends on a number of factors.

How do the R&D tax relief schemes differ?

The key difference between the main merged scheme and the enhanced R&D intensive scheme (ERIS) is the rate of relief provided for successful claims.

Under the merged scheme, a credit is available on qualifying expenditure at a rate of 20 per cent.

Under ERIS, loss-making SMEs can deduct an additional 86 per cent of qualifying costs in calculating their trading loss, as well as the existing 100 per cent deduction. They can also claim a 14.5 per cent non-taxable credit on surrenderable loss.

Additionally, loss-making SMEs must be classed as ‘R&D-intensive’ – meaning they allocate at least 30 per cent of their expenditure to R&D activities.

While ERIS offers a clear benefit over the merged scheme, only certain businesses can claim under it.

How are SMEs defined?

Provided their expenditure qualifies as R&D spending, all businesses are permitted to claim under the merged scheme, regardless of size.

Under ERIS, however, only certain businesses will be allowed to claim – meaning your clients will need to have certain information about their operations to proceed.

They will need to demonstrate that they meet the R&D definition of an SME:

  • Having fewer than 500 employees
  • Achieving a turnover of less than €100 million (£84.5 million) or a balance sheet total of less than €86 million (£72.6 million)

Clients who don’t meet this definition, even if they are loss-making, will need to claim under the main merged scheme.

Loss-making SMEs

ERIS is only available to SMEs which make a trading loss before relief is applied.

Where some business owners trip up is the assumption that this loss only applies to qualifying R&D projects.

In fact, your client must have made an overall trading loss, since eligibility for the scheme is also tied into the intensity of spending on R&D activities.

They must also meet the definition of an SME, otherwise they will need to claim under the main merged scheme.

A question of intensity

The reasoning behind ERIS is to make it easier and more financially rewarding for innovative SMEs to put their efforts behind R&D activities, without having to divert funds unreasonably to keep the business commercially viable where this would have a negative impact on R&D spending.

For this reason, eligible businesses under ERIS must meet the intensity threshold of 30 per cent of expenditure for R&D purposes – reduced in 2024 from 40 per cent.

Supporting clients through R&D tax claims can be a challenge when they are on the threshold between the two schemes.

We can support your R&D tax advisory services in this potential grey area with advice and guidance from tax consultants and sector-specific experts.

Contact a member of our team today to discuss your clients’ needs further.