The key things you need to know about Enhanced R&D intensive support (ERIS), a new scheme offering significant government funding to innovative, unprofitable SMEs.
Are you…
- A small or medium-sized business,
- Registered in the UK,
- Unprofitable,
- Investing heavily in R&D?
Then, you could qualify for enhanced R&D intensive support, a new scheme offering companies a cash credit worth 27p per £1 they invest in R&D. To qualify, your company must be investing at least 30% of your total annual spending on qualifying R&D-related expenditures, such as wages, contractor fees, and raw materials for prototypes.
The government introduced ERIS to provide more support to innovating loss-making startups and scaleups after it cut SME R&D Tax Relief. It is substantially more generous than the other R&D Tax schemes available, offering 45% more funding than the SME scheme and 67% more than both the new and original iterations of the Research and Development expenditure credit (RDEC).
In this blog, I’ve explained the main things you need to know about ERIS, including which businesses are eligible and how much funding you can claim.
As with most aspects of R&D Tax Relief, there may be elements of ERIS you find confusing or unclear. If you have any questions about this new scheme – or R&D Tax Relief generally – our experts would be more than happy to help.
Eligibility criteria for enhanced R&D intensive support
The ERIS scheme applies to expenditures incurred on or after 1 April 2023. To qualify, your company must meet the following criteria:
- Be an SME for R&D tax purposes
- Be unprofitable
- Qualify as R&D-intensive by satisfying “the intensity condition”
If you do not meet these conditions but do qualify for R&D Tax Relief, you will need to claim SME R&D Tax Relief or RDEC, depending on your company’s size and what accounting period you’re claiming for.
Let’s look at each of these criteria in more detail.
What is an SME for R&D tax purposes?
Your company is an SME for R&D Tax purposes if it has:
- Fewer than 500 employees
- And a turnover of less than €100 million
- Or a balance sheet worth less than €86 million
On the face of it, it’s a pretty straightforward calculation. However, things can get a lot more complicated if another business owners 25% or more of your company.
In that case, you would need to include some or all of that business’s staff headcount, turnover, and balance sheet figures – along with any businesses they have significant ties to – when calculating whether or not you are an SME.
Read more about the impact of linked and partner enterprises.
Your company must be unprofitable
You can only claim R&D Tax Relief under the ERIS scheme if your company is unprofitable.
Your company must be unprofitable before you apply the R&D enhancement.
Enhancement artificially increases the value of your qualifying expenditure by 86%—or 130% for costs incurred before 1 April 2023.
Qualifying as R&D-intensive
Your company must be considered “R&D-intensive” by satisfying the “intensity condition”.
Your company satisfies the “intensity condition” if its qualifying R&D investments account for at least 30% of its total expenditure in the period you’re claiming for.
This 30% threshold only applies to accounting periods starting on or after 1 April 2024.
The threshold is 40% for periods starting before 1 April 2024. However, only costs incurred after 1 April 2023 are eligible for ERIS.
One year grace period for enhanced R&D intensive support
Helpfully, if you don’t satisfy the intensity condition for one of your accounting periods, you may still be able to claim funding through the ERIS scheme.
This is thanks to the one-year grace period, which lets you claim under the ERIS scheme if you were R&D-intensive in your pervious 12-month accounting period.
This is contingent on:
- Your previous accounting period includes costs incurred on or after 1 April 2023
- You made a valid SME R&D Tax Relief or ERIS claim for costs incurred in that period
How much funding can you claim from enhanced R&D intensive support?
The Enhanced R&D intensive support scheme lets loss-making SMEs claim relief worth 27p per £1 of qualifying expenditure.
That’s 45% more relief than SME R&D Tax Relief (18.6p per £1) and 67% more than the merged scheme (16.2p per £1).
ERIS is more generous because its surrender rate is 14.5% instead of the 10% offered by the SME scheme.
The surrender rate is the percentage at which you can surrender an R&D-related loss for a cash credit.
With a surrender rate of 14.5%, you can ‘cash in’ a £100,000 loss for a £14,500 credit. Under the SME scheme, you’d only receive £10,000.
| Scheme | Maximum relief for loss-making SMEs |
|---|---|
| Enhanced R&D intensive support | 27% |
| SME R&D Tax Relief | 18.6% |
| RDEC | 16.2% |
However, ERIS is less generous if your company broke even – or nearly broke even – in the period you’re claiming for.
If you exactly broke even, you would only be able to claim 10.8p per £1 of qualifying expenditure. While this is still higher than the 8.6p offered under the SME scheme, it is lower than the 16.2p available under the RDEC scheme.
This is because you’ll only be able to surrender the additional loss created by enhancement rather than any actual loss attributable to R&D. It’s a curious and unfortunate aspect of ERIS and a hangover from the SME scheme.
Enhanced R&D intensive support - example calculation
Let’s say you are a pre-revenue company that invested £200,000 in R&D.
It’s unlikely, but for the sake of simplicity, let’s say you spent all £200,000 on qualifying costs.
Also, let’s say your company is not affected by the PAYE Cap – more on that in the next section.
Here’s how you would calculate your R&D Tax Relief under the ERIS scheme.
Enhancement
| Term | Example value |
|---|---|
| Total qualifying expenditure | £200,000 |
| R&D enhancement | £172,000 |
| Enhanced expenditure | £372,000 |
This gives you an enhanced expenditure – your total qualifying expenditure plus the 86% enhancement – of £372,000.
Surrender
Next, you would calculate your R&D tax credit by multiplying your enhanced expenditure by the 14.5% surrender rate.
So, £200,000 in qualifying R&D expenditure translates to a cash credit of £53,940.
Relief rate
To determine your relief rate, you would divide the cash credit by your qualifying expenditure:
That works out to a relief rate of 26.97%.
Common mistakes when calculating ERIS claims
The example above makes calculating your relief look extremely easy. In reality, many companies either under-claim and miss out on valuable funding, or claim too much, risking an HMRC enquiry that can delay funding by several months.
Here are some common mistakes businesses make:
- Ignore qualifying costs
- Claiming for ineligible costs
- Apportioning too much of their costs to their projects
- Neglecting to claim for costs associated with indirect activities
- Claiming for qualifying costs incurred before 1 April 2023
GrantTree R&D Tax experts can make sure you are claiming the correct amount, ensuring you receive your full funding allowance while minimising your risk of an enquiry.
For help with your upcoming claim, just drop us a line.
Enhanced R&D intensive support and the PAYE Cap
If your business doesn’t have many employees or relies heavily on contractors, your funding may be reduced by the PAYE Cap.
The PAYE Cap was reintroduced in 2021 to prevent shell companies from taking funding from R&D Tax Relief while contributing little to the UK economy.
The PAYE cap is £20,000 plus 300% of your combined PAYE and National Insurance Contribution (NIC) liabilities.
So, if your PAYE/NIC liability was £100,000 during your last accounting period, the maximum credit you would be able to claim from ERIS would be £320,000.
Any funding over this amount would be carried forward to your next accounting period.
How do I claim enhanced R&D intensive support?
Below is an objective summary of the information you must submit to HMRC to claim R&D Tax Relief under the ERIS scheme.
But first, a word of caution: don’t let the simplicity of the list below fool you.
Preparing a fully compliant R&D Tax Relief claim that satisfies both the government’s strict eligibility requirements and HMRC’s rigorous standards takes a great deal of time, effort and attention to detail.
Even small, innocent mistakes – such as misinterpreting one element of the complex legislation or overlooking one of the many recent reforms – can trigger an HMRC enquiry, embroiling your key people in time-consuming exchanges with tax inspectors.
I don’t say this to put you off claiming. Far from it. R&D Tax Relief is essential to innovation, and I believe all companies that are eligible for it should claim it. I say it because I don’t want to give you the impression that claiming R&D Tax Relief is easy or should be taken lightly.
With that in mind, let’s look at the claims process.
Two key pieces of information
To successfully claim Enhanced R&D Intensive Support, you must submit:
- The relevant information in your company accounts
- A completed additional information form (AIF)
Company accounts
You need to include the following information in your company accounts:
- The size of credit you are receiving, recorded as taxable income
- The additional trading loss caused by the enhanced expenditure
You also need to tick boxes 656 and 657 in your CT600.
The additional information form
As of 8 August 2023, all companies must submit the AIF to support their claim.
In it, you’ll have to provide a range of financial and technical information about your projects, including:
- The scientific or technological advances you were seeking
- The uncertainties you encountered and how you looked to overcome them
- The total qualifying expenditure for each project
- Your costs broken down into the nine qualifying cost categories
- Contact details for the person responsible for R&D at your company
- Contact information for any agent that helped you prepare your claim
If you don’t submit the AIF, HMRC will reject your claim.
The extra information contained in the AIF lets HMRC identify potentially non-qualifying projects and costs and investigate the claims containing them.
Secure your funding, protect your reputation
Thinking about applying for ERIS or another type of R&D Tax Relief?
My fellow R&D Tax experts and I can help you prepare a fully compliant claim, minimising your chance of enquiry while ensuring you access your full funding allowance.
With 14 years of experience, over £400 million secured for our clients, and free enquiry defence as standard, GrantTree is the perfect partner for your upcoming R&D Tax Relief claim.
To learn more about our service and how we can help you secure funding safely, just get in touch.
