What is the process for switching schemes?

As your business scales up or down, you might not qualify for the same R&D tax credits as before. Changes in company size won’t usually affect your SME or large company status until they apply for two years in a row. This is often referred to as a grace period. This provides a degree of stability and helps prevent businesses from moving between R&D tax relief schemes due to short-term fluctuations in size.

If a large company buys your SME, this grace period is usually skipped and you’re immediately considered part of a large company group. This is important in industries with many mergers and acquisitions, where a change in ownership can have a direct impact on how future R&D claims are treated.

While the distinction between SMEs and large companies is less important under the merged R&D scheme introduced from 1 April 2024, company size can still be relevant in certain circumstances. For example, qualifying loss-making R&D-intensive SMEs may be eligible for Enhanced R&D Intensive Support (ERIS), which is not available to large companies.

For this reason, it’s important to understand when a change in company size takes effect. Businesses approaching the SME thresholds, or those considering investment, acquisition, or restructuring activity, should be aware of how these changes may affect future R&D tax relief claims and planning.

If your accounting period begins on or after 1 April 2024, the distinction between SME and large company status is not as heavily recognised than it was previously. This is due to recent legislative changes that introduced a new merged R&D tax relief scheme, replacing the separate SME and RDEC regimes for most companies.

The aim of these changes is to simplify the R&D tax relief landscape and provide a more consistent approach to supporting qualifying R&D expenditure. Certain differences remain, particularly for qualifying loss-making R&D-intensive SMEs that may be eligible for Enhanced R&D Intensive Support (ERIS).