Navigating the landscape of R&D tax relief can be complex, especially for loss-making SMEs undertaking intensive research and development activities. With recent changes to the UK’s R&D tax credit system, it’s more important than ever to understand how the new Merged Scheme compares to the SME intensive scheme, and how to choose the most beneficial route for your business.
Case Study
At BHP, we recently explored a case involving a loss-making, SME-intensive company. At first glance, the SME intensive scheme appeared to offer a more generous return. This scheme allows qualifying companies to uplift their R&D expenditure by 86% and cash in enhanced losses at a rate of 14.5%, potentially delivering a benefit of up to 26.97%.
However, the key phrase here is “up to.” The actual benefit depends heavily on how much of the enhanced losses can be cashed in. In our case study, only around 55% of the enhanced losses were eligible, reducing the effective benefit to just 14.83%. In contrast, the Merged Scheme offers a 20% taxable credit, with notional tax deducted at 19%, resulting in a consistent effective benefit of 16.2%.
This means that for companies unable to cash in at least 60% of their enhanced losses under the SME intensive scheme, the Merged Scheme may actually be the more advantageous option. We have calculated the break-even point to be approximately 60%, where the benefit from the SME intensive scheme aligns with the 16.2% offered by the Merged Scheme.
It is also important to note that businesses can choose to claim under the Merged Scheme even if they are eligible for the Enhanced R&D Intensive Support (ERIS). However, you cannot claim under both schemes for the same expenditure. This decision can significantly impact your Corporation Tax estimates and cash flow planning, especially in the early stages of your R&D journey when accounting results may still be uncertain.
As the R&D landscape continues to evolve, our specialist team at BHP is committed to staying ahead of the curve and ensuring our clients receive the most accurate and strategic advice possible.
Considering an R&D project or unsure which scheme is right for you?
Get in touch with one of BHP’s R&D tax specialists today. We will help you assess your eligibility, model your potential returns, and guide you through the claims process to maximise your benefit.
