R&D tax relief – the new 'intensity' test

The government has introduced a new tier of R&D tax relief for 'R&D intensive' SMEs—those whose qualifying R&D expenditure constitutes at least 40% of their total expenditure.

These companies can claim a higher payable credit rate of 14.5%, even after the general SME credit rate was reduced. This measure aims to protect the most innovative small businesses while the wider R&D system undergoes reform.

Why the change?

Following concerns about fraud and boundary-pushing within the SME R&D scheme, the government reduced the generosity of the main scheme. However, they recognised that this would unfairly penalise genuine, highly innovative startups—particularly in the life sciences and technology sectors—that operate at a loss while developing new products. The 'intensive' scheme was created specifically to support these high-risk, high-reward businesses.

Calculating intensity

To qualify as R&D intensive, a company must calculate its 'R&D intensity ratio'. This is the total qualifying R&D expenditure divided by the company's total expenditure for the accounting period (with some specific adjustments). If this ratio is 40% or higher (later reduced to 30% for periods from April 2024), the company qualifies for the enhanced 14.5% payable credit.

Claiming the relief

Claiming R&D relief has become significantly more complex, requiring detailed technical reports and financial breakdowns to satisfy HMRC's heightened scrutiny. Companies must now submit an 'Additional Information Form' digitally before filing their Corporation Tax return. Partnering with a specialist R&D tax advisor is more important than ever to ensure claims are robust and compliant.