What are the R&D tax credit rates for the SME scheme?

The research and development (R&D) tax credit scheme for SMEs offers a benefit of up to 21.5% from 1 April 2023 – the equivalent of up to 21p for every £1 spent on qualifying expenditure. The exact rate of relief you receive will depend on your Corporation Tax position, and whether you are profit- or loss-making, or an R&D intensive SME.

SME R&D tax credits offer an enhanced deduction for your R&D expenditure. Typical eligible R&D costs include: staff and subcontractor costs, materials and consumables including heat, light and power as well as some types of software.

R&D tax credit rates for a profitable SME

Your R&D expenditure already typically attracts tax relief as part of the normal operational costs of your trade. From1 April 2023, an R&D tax credit claim then allows a further 86% of this eligible R&D expenditure to be deducted when calculating the profits of your company’s trade. Prior to 1 April 2023 a further deduction of 130% of R&D expenditure is allowable when calculating the profits of your company’s trade. Your exact return will depend on your qualifying R&D activities and costs.

R&D tax credit rates for a loss-making SME

Prior to 1 April 2023, the SME R&D tax credit scheme also allows loss-making companies to claim a payable credit at a rate of 14.5%. A loss-making company with an estimated R&D spend of £500,000 could claim up to £166,750 as a tax credit.

From 1 April 2023, the SME R&D tax credit scheme still allows loss-making companies to claim a payable credit but at a slightly lower rate of 10%. A loss-making company with an estimated R&D spend of £500,000 could claim up to £93,000 as a tax credit.

Where a company qualifies for the new R&D intensive rate – defined as companies who spend at least 40% (lowered to 30% for accounting periods beginning on or after 1 April 2024)of their total expenditure on qualifying R&D, then it can continue to claim a credit at the pre 1 April 2023 rate of 14.5%.

As noted above, for accounting periods starting on or after 1 April 2024, unless a business meets the R&D intensive threshold, they will need to claim under the single scheme. The R&D intensive threshold is reduced to 30% for these periods.

_{*Effective rate – the rate at which a company will benefit from the R&D incentive when taking into account tax savings from R&D enhancements, rates of credit available and tax payable. For example, a company spending £1m on R&D and claiming RDEC, receives a gross credit of £200k. If tax is applied to this credit at 25%, the company will actually receive a benefit of £150k, equating to an effective rate of 15% of its R&D expenditure.}

_{**For accounting periods starting on or after 1 April 2024, the R&D intensive threshold falls from 40% to 30%.}

_{***Accounting periods beginning 1 April 2024.}