SME and large company R&D claims and how to know which scheme applies

Research and development (R&D) tax relief is one of the UK government’s key incentives to encourage businesses to invest in innovation. By offering relief on qualifying costs, it helps companies offset some of the financial risks that come with advancing science and technology. The rules have evolved significantly in recent years, with reforms reshaping how SMEs and large companies make claims. Understanding which scheme applies to your business is the first step in accessing the right support.

How R&D tax relief works

The scheme rewards companies that attempt to overcome scientific or technological uncertainties through systematic investigation. To qualify, your project must aim to achieve an advance in a field of science or technology that competent professionals could not easily resolve using existing knowledge. Routine improvements or purely aesthetic changes do not qualify.

Detailed guidance is available from HMRC on how the rules work and what qualifies as R&D activity under the legislation, including the criteria for small and medium sized enterprises. This government resource is the best starting point for understanding the framework.

Small and medium-sized enterprise (SME) Scheme (for accounting periods starting before 1 April 2024) Small and medium-sized enterprises (SMEs) benefited from enhanced R&D tax relief provided they met certain size and funding conditions. To qualify as an SME for R&D purposes, a company (including any linked or partner enterprises) must have had fewer than 500 employees, and either turnover below €100 million or a balance sheet total under €86 million.

Under the SME scheme, companies could claim a tax benefit typically worth between 18p and 33p for every £1 of qualifying R&D spend. The precise rate depended on factors such as:

• whether the company was profit-making or loss-making, whether it qualified as “research-intensive” (spending at least 40% of total costs on R&D),
• and whether any grants or subsidies applied

From 1st April 2023, the rates were reduced for most SMEs. The enhanced deduction was cut from 130% to 86%, and the cash credit for loss-makers fell from 14.5% to 10%. However, research-intensive SMEs continued to receive support at the 14.5% rate, recognising the higher risk and cost of their work.

What this means in practice: an SME spending £500,000 on eligible R&D could receive anything between £93,000 and £167,000 back, depending on its profitability, intensity position and applicable rates.

Research and Development Expenditure Credit (RDEC) Scheme (for accounting periods starting before 1 April 2024) The RDEC scheme was designed primarily for large companies which are those with more than 500 employees and either turnover above €100 million or a balance sheet total above €86 million (including any linked or partner enterprises).

However, smaller businesses can sometimes fall into the RDEC rules too. This could happen if their R&D projects were subsidised by grants or state aid, or if they carried out R&D as subcontractors for large companies. Unlike the SME scheme, RDEC worked as an “above-the-line” credit, meaning it appeared as taxable income in the company’s accounts. After Corporation Tax was applied, the net benefit was lower than the headline rate.

From 1st April 2023, the RDEC rate increased from 13% to 20%. In practice, once tax was factored in, the net benefit usually ranged from 10.5% to 16.2% of qualifying R&D costs. That equates to receiving 10p–16p back for every £1 spent on eligible activity. For example, if a company invested £500,000 in qualifying R&D under the RDEC scheme, the headline credit at 20% would be £100,000. Once Corporation Tax was applied, the net benefit would typically fall between £52,500 and £81,000, depending on the company’s tax position and applicable rates.

Changes from 1st April 2024

For accounting periods starting from 1st April 2024, the government introduced a major reform to the UK’s R&D tax relief framework. The previous SME and RDEC schemes were merged into a single regime, with the aim of simplifying the system.

Under the merged scheme, all companies now claim under one set of rules, regardless of size. Relief is delivered as a taxable, above-the-line expenditure credit which is similar in structure to the old RDEC scheme. The rate is set at 20% of qualifying R&D costs. After Corporation Tax is applied, this typically results in a net benefit of 15p-16p per £1 spent on eligible R&D.

For example, a company spending £500,000 on eligible R&D would generate a credit of £100,000 at the flat 20% rate. After Corporation Tax, the net benefit is usually £75,000-£81,000. An important exception applies for loss-making, research-intensive SMEs through the Enhanced R&D Intensive Support (ERIS) measure. To qualify, a company must:

• Meet the SME definition (fewer than 500 employees and either turnover under €100 million or a balance sheet under €86 million, including linked/partner enterprises),
• Be loss-making, and
• Spend at least 30% of total costs on qualifying R&D (aggregated across connected companies).

Where these conditions are met, ERIS provides additional support:

• An extra 86% deduction on qualifying R&D costs (on top of the standard 100%), and
• The ability to surrender the enhanced loss for a cash credit at 14.5%.

In practice, this means a qualifying research-intensive SME could receive up to 27p back for every £1 spent on eligible R&D which closely mirrors the more generous support previously available under the legacy SME scheme. Therefore, if a qualifying research-intensive SME invested £500,000 in eligible R&D, it could surrender the enhanced loss for a cash credit at 14.5%. This would generate a benefit of up to around £134,850.

Why it matters to know which scheme applies

Choosing the right R&D scheme is critical. It directly affects how much relief your business can claim and whether HMRC will accept it. An SME that applies under RDEC rules could lose out on tens of thousands in support, while a large company claiming under the SME regime risks rejection and enquiry. With HMRC applying ever-greater scrutiny, accuracy is essential.

Understanding the differences between the SME scheme, RDEC, and the new merged regime not only ensures compliance but also maximises the value of your claim. It allows businesses to plan their R&D activity with confidence, knowing what support they can expect and how to structure projects for the best financial outcome. Gravita’s team helps you navigate these rules with clarity, so you can focus on innovation while we safeguard your claim.

Moving forward with confidence

R&D tax relief remains one of the most valuable sources of funding for businesses investing in innovation. But with the rules complex and evolving, the key is knowing which scheme applies, understanding the criteria, and preparing claims that meet HMRC’s expectations.

That’s where Gravita helps. If you’re unsure about eligibility, our free consultation provides clarity. If you want peace of mind before filing, our independent claim review highlights risks and missed opportunities. For companies looking for complete support, our end-to-end service ensures every claim is fully evidenced and compliant. If HMRC does raise questions, our enquiry defence service protects value and minimises disruption.

By integrating R&D relief into your financial planning with specialist support, you gain certainty that your claims are maximised, your risks are managed, and your innovation is fully supported.