How enhanced R&D intensive support (ERIS) helps innovative businesses to grow

Introduction to enhanced R&D intensive support

One of the main changes to R&D tax relief for companies with accounting periods beginning on or after 1 April 2024 is the introduction of enhanced R&D intensive support (ERIS).

ERIS supports some of the UK’s most innovative small companies. It offers qualifying companies R&D tax relief at a higher rate than the merged scheme. Tax credits worth up to 27% of the R&D expenditure can be achieved through ERIS claims. This represents a differential of up to 11% when compared with an equivalent claim made under the merged scheme.

ERIS operates in a similar manner to the previous SME scheme. It offers eligible companies the ability to take an additional deduction for its R&D costs. They can then surrender some of the generated losses for a repayable tax credit.

Qualifying for enhanced R&D intensive support

To qualify, companies must be R&D intensive, loss-making SMEs meaning R&D expenditure accounts for at least 30% of the company’s total expenditure. For pre-trading companies, an election can be made to treat R&D expenditure as deemed trading losses. It allows them to be surrendered for an R&D tax credit offering a significant benefit for pre-trading companies. It accelerates R&D relief on pre-trading R&D expenditure and offers a greater rate of relief than would be available from a merged scheme R&D claim made in the company’s first trading accounting period. The accounting period in which the expenditure of the previous seven pre-trading years can be deducted.

A key difference between ERIS and previous SME scheme sees the removal of rules surrounding subsidised R&D expenditure. These rules previously prevented SMEs from claiming R&D tax relief under the SME scheme. The rule minimised potential R&D tax benefits where grants and subsidies were received in relation to R&D activities. This change will ease the complexities previously faced by companies who were in receipt of subsidies (such as grant funding) in relation to their R&D projects. It will also widen the scope of companies who will be eligible for ERIS.

Unlike the previous SME scheme (and the previous enhanced R&D intensive tax credit that was claimable), eligible claimants must be loss-making before considering any additional R&D deductions.

Finally, in line with the merged scheme, companies cannot claim relief on R&D projects which are contracted out to them. New rules surrounding contracted-out R&D need to be considered where projects are carried out for clients. This is to establish whether a project is deemed contracted-out. There’s an exception within the contracted-out R&D rules that also must be considered in some circumstances relates to ineligible companies. Where the contracting company is an ‘ineligible company’ (i.e. a charity or institution of higher education) and therefore unable to make an R&D claim itself, the contracted company may be able to make an R&D claim for the relevant R&D activity.

R&D intensity condition

When calculating R&D intensity, the R&D expenditure of the claimant company and companies that it was connected with during the accounting period must be considered. The sum of the R&D expenditure totals is then compared with total expenditure of the same companies.

Total spends includes all costs brought into account in calculating profits for the period. It also includes capitalised revenue expenditure which is brought account in line with s1308 CTA 2009. The amount does not include payments between connected companies (preventing double-counting of expenditure). It also does not include amortisation which is disallowed as a result of a deduction for capitalised R&D expenditure (s1308 CTA 2009).

If a company doesn’t meet the R&D intensity rule in a given year but did meet it and claimed under ERIS (or the earlier R&D intensive SME credit) the year before, it can still claim under ERIS for one more year. This is thanks to a one-year grace period.

Tax benefit

As the mechanics of the ERIS follows the previous SME scheme, the tax benefit achievable is dependent on the ‘surrenderable loss’ that arises. This is the amount of unutilised loss which can be surrendered for a tax credit.

In line with the old SME scheme, the amount of loss is the lower of the actual unutilised loss in the period, or the enhanced R&D expenditure (the R&D expenditure plus the R&D enhancement (a further 86% of the R&D expenditure), so 186% of the R&D expenditure).

In cases where the actual unutilised loss in the period is lower than the enhanced R&D expenditure (as is the case where the pre-R&D loss is less than the R&D expenditure amount), the tax benefit rate achievable will be reduced. In some cases, the tax benefit rate achievable from an ERIS claim could be as low as 12.5%. In such cases, making a claim under the merged scheme would offer a greater tax benefit. Therefore it should be considered to establish the best overall result for the company.

Pay as you earn (PAYE) and national insurance contributions (NIC) cap

In addition to the loss-position, companies must consider the PAYE and NIC cap. The cap is based on the old SME PAYE rule. It equals £20,000 plus 300% of the company’s relevant PAYE and NIC costs. If the credit exceeds the cap, any excess amounts will not be claimable and will not be carried forward. The approach differs to the merged scheme where excess amounts can be carried forward. The cap impacts repayable credits where overall payroll costs are low. An example scenario where this cap could apply therefore is where a company’s employees only include company directors and the directors pay themselves low salaries.

An exemption to the PAYE and NIC cap applies to some companies, where two conditions are both met:

• The company is creating or preparing to create relevant intellectual property (IP), or it performs significant management activity in relation to relevant intellectual property that it holds, and
• R&D expenditure incurred in the relevant accounting period in relation to subcontractors (or externally provided workers) provided by connected companies does not exceed 15% of the company’s R&D expenditure for the period.

Summary

ERIS offers a more generous R&D tax relief. However the complexity of its eligibility criteria requires careful consideration to ensure technically correct claims are submitted.