What Are the Changes to the R&D Tax Credits Scheme and How Might They Affect SMEs in the UK?
Sarah Cheesman, 07 December 2023
The UK is a hive of innovation, with businesses in almost every sector pushing their boundaries and finding new and exciting ways to grow their industry. The UK government introduced Research & Development (R&D) tax credits to encourage and reward companies that are innovating. However, recent changes to the scheme have caused a number of challenges for businesses. Many are unsure whether their activities are still eligible, or are concerned about working with R&D tax relief consultancies that are not operating above board, putting the company at risk of investigation from HMRC.
In this article, we’re taking a closer look at the changes that have been introduced, and how this is set to affect innovative SMEs in the UK.
What are R&D tax credits?
Originally introduced in 2000 for small and medium-sized businesses in the UK and later extended to large companies in 2002, R&D tax credits represent a government initiative aimed at encouraging businesses to increase their investments in research and development endeavours. This programme enables profitable companies to reduce their tax liability, while unprofitable ones can receive cash credits as a portion of their R&D expenditures.
Presently, there are three distinct avenues for obtaining these incentives:
- Small or Medium-sized Enterprise (SME) Scheme
- Large Company Scheme
- Research and Development Expenditure Credits (RDEC)
What is an SME?
SME stands for Small and Medium-sized Enterprises, and are businesses that fall within a specific range of size and annual turnover. These enterprises play a crucial role in the UK economy and encompass almost every industry and sector you can think of.
The specific criteria for categorising a business as an SME in the UK may vary slightly depending on the industry and the organisation’s structure, however, the general definitions for SMEs in the UK are as follows:
Small Enterprises:
- Employ fewer than 50 people
- Annual turnover does not exceed £10m (or the equivalent in euros)
- Balance sheet total does not exceed £10m (or the equivalent in euros)
Medium-sized Enterprises:
- Employ fewer than 250 people
- Annual turnover does not exceed £50m (or the equivalent in euros)
- Balance sheet total does not exceed £43m (or the equivalent in euros)
How has the R&D tax credits scheme changed?
The government announced a number of changes to their tax and spending plans in both the 2023 Spring Budget and the 2023 Autumn Statement.
Merger of R&D tax reliefs
Currently, there are two separate schemes for R&D tax reliefs: RDEC (Research and Development Expenditure Credit) and SME scheme.
- From 1 April 2024, these two will merge into one scheme
- This merger aims to simplify the tax process by having one set of rules and making the tax credit more visible
- For companies making losses, the tax rate applied in this new scheme will be reduced from 25% to 19%
Additional tax-relief for R&D intensive loss-making SMEs
There’s additional tax relief for SMEs that are heavily involved in R&D and are making losses.
- The requirement for how much a company must spend on R&D to qualify for this relief is being reduced from 40% to 30% of their total expenditure
- This change means around 5,000 more SMEs will be eligible for this relief
- If a company's R&D spending falls below 30%, they'll still receive this relief for one more year
Removing nominations and voiding assignments for R&D tax reliefs
From 1 April 2024, companies can no longer nominate a third party to receive their R&D tax credit payments, with a few exceptions. Also, from 22 November 2023, companies can’t assign their R&D tax credits to others.
This means R&D tax relief payments will go directly to the company that made the claim, aiming for more efficient and direct payment processing.
Closing the R&D review
The government has been reviewing the R&D tax relief schemes since the Spring Budget 2021. This review aimed to ensure the UK remains attractive for advanced research and that these tax reliefs are still appropriate—it concluded with the announcement of the merged R&D tax relief scheme.
HMRC plans to publish a plan to tackle non-compliance in R&D tax reliefs. The government will keep working with industries to improve support for SMEs heavily involved in R&D and may consider further simplifications in the future.
Other changes
In addition to these R&D tax relief-specific changes, there were also changes in the Spring 2023 and Autumn 2022 budget which were relevant to innovative businesses, such as the return of a main rate and small profits rate of Corporation Tax. These both have implications for both SME and RDEC companies, with many now paying higher rates of tax than previously, diminishing their profits.
These changes are now in place for any expenditures that take place after 1st April 2023. As the scheme works retrospectively, most current R&D claims for the last accounting period will continue to benefit from the more generous rates.
Find out more in the Autumn Statement 2023.
Why are these changes being made to R&D tax relief and how will this affect SMEs?
The reformation of the R&D tax relief scheme is to help ensure that public money is being spent effectively and helping to drive forward innovation in the UK. After it came to light that a number of R&D tax relief claims had been made fraudulently, the government chose these new measures as a way to crack down on this continuing.
While some of these measures may not be beneficial for everyone, the changes still provides an incentive for innovation.
Who are the UK’s top SMEs?
At Beauhurst, we currently track 39,487 SMEs in the UK that have hit one or more of our high-growth tracking signals.
Below, we’ve compiled a ranking of the top 10 SMEs in the UK, based on the amount of equity investment they’ve received to date. All of these private companies are headquartered in the UK, and have received sizable investments from venture capital firms and other top players in the high-growth ecosystem.
The top 10 UK SMEs
We’ve ordered our companies from 10 to one.
10.
Artios Pharma
Established: 2015
Location: Cambridge
Based at the Babraham Institute in Cambridge, Artios Pharma develops groundbreaking cancer treatments that target DNA Damage Response (DDR) pathways to kill or weaken cancer cells. The company was placed on the BusinessCloud MedTech 50 high-growth list in 2021.
Artios Pharma has secured £245m in equity investment, across five funding rounds. Investors include Arix Bioscience, CRT Pioneer Fund, Pfizer Venture Investments, and SV Health Investors. The company’s most recent equity deal, in July 2021, saw it reach a post-money valuation of £242m.
09.
Quanta
Established: 2008
Location: Warwick
Quanta’s business is aimed at making dialysis more accessible for patients, by developing portable haemodialysis devices for clinical and home treatment of patients. To date, they have raised a total of £246m through six rounds of fundraising, with the most recent being for £17.1k in March 2023. Prior to this, they raised £176m in June 2021 to help them expand global operations and increase their manufacturing, sales and customer service capabilities.
They also received a £1.85m grant in August 2015 from Call 14 i4i Product Development Award, managed by the National Institute for Health Research (NIHR). Quanta also made the Lazard T100 European Venture Growth Index high growth list in 2021.
08.
Zenobē
Established: 2016
Location: London
Zenobē provides a range of battery storage facilities and charging points, aimed at helping to deliver clean power and transport solutions across the globe. They have so far raised a total of £248m through 7 rounds of fundraising, the most recent of which was a loan fundraising in February 2022.
Their most recent equity fundraising round was in November 2020, which saw Infracapital invest a total of £150m to allow the company to expand internationally and help the UK convert to green-energy systems.
07.
Impact Oil & Gas
Established: 2009
Location: London
At seventh on our list, Impact Oil & Gas explores new potential in unexplored sedimentary basins for oil and gas in offshore Africa. So far, they have raised a total of £302m through 14 rounds of equity fundraising, the largest of which was in April 2023 for £78.3m. This was to further appraise and explore its drilling programmes, and was contributed to by Africa Oil and other undisclosed investors.
They have also made one acquisition, of Black Star Petroleum in February 2014.
06.
Zilch Technology
Established: 2018
Location: London, UK
Zilch Technology is a mobile app developer based in London. Their product is designed to provide users with a zero-interest, staggered payment option for online shopping. They have raised a total of £312m to date through nine rounds of fundraising. The most recent of these was in October 2023 for £19.2m, contributed to by Ebay Inc.
They have also made one acquisition, of NepFin (a provider of financial and advisory support for SMEs) in August 2021.
05.
Africa Mobile Networks
Established: 2013
Location: Milton Keynes
Based in Milton Keynes, Africa Mobile Networks develops and maintains infrastructure across Africa to help mobile operators improve coverage. Since their beginnings in 2013, they have raised £331m in equity fundraising, the most recent of which was in August 2021 for £28.2m.
This was contributed to by a number of investors, including CDC Group, DEG Invest, Mauritius Commercial Bank, Metier, Proparco and other undisclosed investors. The aim of this investment was to expand internationally and increase the number of mobile network towers.
04.
Karma Kitchen
Established: 2017
Location: London
Karma Kitchen operates several industrial kitchen spaces that can be hired by external businesses. They specialise in turning underutilised industrial sites into cleverly designed commercial kitchen units. To date, they have seen £352m raised through equity fundraising, the most recent of which was in December 2021. This was for a total of £100m, contributed by Crosstree Real Estate Partners.
03.
Netomnia
Established: 2020
Location: Tewkesbury
Fibre broadband provider, Netomnia, is coming in third on our list. They have so far secured £734m in equity and loan fundraising, with £86m raised in their most recent equity round in February 2023.
A previous fundraising round for £295m in June 2022 was aimed at helping them to roll out multi-gigabit broadband across the UK. This was boosted in March 2023 with a further loan fundraising for £230m from a group of six bank lenders ((HSBC UK, ING, NIBC, RBC, Standard Chartered, and UKIB).
02.
Hopin
Established: 2019
Location: London
Hopin is a platform that provides a suite of audience engagement tools for their audience, including StreamYard, Streamable, and Superwave (beta). They have raised a total of £766m through equity fundraising rounds to date, with the most recent being in March 2022. This was for a total of £5.07m, raised through undisclosed investors.
They have also made a total of 6 acquisitions, including Attendify, Boomset, Jamm, Streamable, Streamyard, and Topi. They have seen their name on a number of high growth lists, including Best Workplaces for Innovators, Lazard T100 European Venture Growth Index, and LinkedIn Top Startups UK, all in 2021.
01.
Revolut
Established: 2013
Location: London
Topping our list is Revolut, which operates a challenger bank providing an app where users can trade cryptocurrency, track and send money, as well as a range of other financial services. Since their beginnings in 2013, they have raised a huge £1.27b in equity and loan fundraising. The most recent of these was completed in July 2021 for £578m, with contributors including Schroders, Softbank Vision Fund, and Tiger Global Management.
They have also made two acquisitions; Wanted, an online job marketplace, in October 2021 and Nobly, a point-of-sale interface provider, in November 2021. Revolut has made a number of high-growth lists, including Deloitte Fast 50, LinkedIn Top Startups UK, and Fast Track Tech Track 100.
Should my company still claim R&D tax credits?
While the recent changes to the R&D tax credit scheme represent a significant shift in how SMEs can access valuable incentives for their innovation and research activities, it’s important to remember that these changes are aimed at promoting greater financial support for businesses that truly need it.
With innovation playing a pivotal role in the UK’s economic growth, SMEs should not consider these changes as a reason to be discouraged, but rather embrace them as opportunities to thrive and contribute to a more innovative and competitive business landscape.
If you want to find out more about the SME landscape in the UK, the Beauhurst platform has everything you need. With our unique combination of machine learning models, data extraction, and 60+ data analysts, the information we provide is unrivalled in the UK market. To find out more, book a demo today or get in touch with our friendly team.
