Enhanced R&D intensive support (ERIS)

This enhanced rate of support is designed by the government to reward SMEs, in particular those in R&D intensive sectors for investing in innovation.

Who is eligible for enhanced R&D intensive support (ERIS)?

To be eligible for enhanced R&D intensive support (ERIS), a business must:

• Be an SME (see definition) AND
• Make a tax loss in the period AND
• Meet the R&D intensity threshold.

What is the R&D intensity threshold and how is the intensity ratio calculated?

In order to be considered R&D intensive for ERIS, a company must meet the intensity threshold. For expenditure incurred on or after 1 April 2023, this threshold was set at 40%, before being lowered to 30% for accounting periods beginning on or after 1 April 2024.

To calculate a company’s intensity ratio, you take relevant R&D expenditure for the period divided by total relevant expenditure for the period, where:

Relevant R&D expenditure = qualifying R&D expenditure (per your R&D claim) combined with that of any connected companies.

Total relevant expenditure = trading expenditure per your P&L plus any qualifying pre-trading expenditure plus any amounts deducted in your tax computation under section 1308 CTA 2009 minus any related amortisation added back in your tax computation under section 1308 CTA 2009 minus any expenditure on connected companies. Again, this should be combined with the total relevant expenditure of any connected companies.

When does enhanced R&D intensive support (ERIS) come into effect?

The enhanced rate of relief for loss-making R&D intensive SMEs applies to expenditure incurred from 1 April 2023 (although the legislation enabling companies to make a claim was only enacted in February 2024). Companies eligible for the relief who already claimed under the existing SME scheme can amend their tax returns within the normal time limits to include the additional credit amount.

What is the intensity threshold for accounting periods beginning on or after 1 April 2024?

An SME will meet the intensity threshold if 30% of your overall total business expenditure is spent on qualifying R&D activity. This applies for accounting periods beginning on or after 1 April 2024.

A one-year grace period applies for companies who drop below the threshold for R&D intensity. This is intended to protect businesses from moving in and out of the enhanced rate retrospectively, which would have implications for financial planning.

A note on losses

A company must be loss-making in order to claim ERIS. However, the meaning of ‘loss-making’ for this purpose depends on the timing of expenditure.

For claims made in relation to expenditure incurred on or after 1 April 2023, but where the accounting period begins before 1 April 2024 (i.e. when the 40% intensity threshold applies), a company will be eligible if it has a surrenderable loss for R&D, meaning a loss for tax purposes after the R&D enhancement has been applied.

Conversely, claims for accounting periods beginning on or after 1 April 2024 (i.e. when the 30% intensity threshold applies) will only be possible if the company has a tax loss before the R&D enhancement.

Why is it happening and what to consider?

Like its predecessor, enhanced R&D intensive support is intended to recognise the role that R&D plays in driving innovation and economic growth. It also addresses the difficulties SMEs can face in raising capital in their pre-revenue phase, particularly to support innovation. The enhanced rate of credit protects the most innovative SMEs in key sectors such as life sciences from the significant rate reduction introduced for other SMEs.

SMEs who think they could be eligible for the enhanced rate of relief need to ensure they understand how the intensity threshold is calculated and when the enhanced rate will apply from. Good records of R&D expenditure will help to support the preparation of robust R&D claims and provide a foundation for financial planning so that your business can make the most of the relief available.

What are the rates for a loss-making R&D intensive SME?

R&D intensive SMEs are eligible for a higher payable credit rate of 14.5% if they meet the definition for R&D intensity.

How to calculate an R&D intensive SME claim

In the year ending 31 March 2024, an SME business spends £500k on R&D, has total business expenditure of £1 million and makes a taxable loss of £750k before claiming R&D tax relief. 

To reward businesses for their investment, the government allows you to enhance your qualifying expenditure. You may then surrender losses up to the value of your enhanced R&D expenditure for a payable tax credit.

As the company has spent more than 40% of its total business expenditure on R&D, it meets the R&D intensity threshold.

The company has made a loss in the period and is therefore potentially eligible for a payable tax credit.

Companies registered in Northern Ireland

The restrictions on overseas third party costs do not apply to companies registered in Northern Ireland. Instead, however, any credit claimed under ERIS will be considered de minimis state aid and will therefore be subject to a cap of €300,000.

The cap applies to de minimis aid received in any three-year period ending on the day in which the claim is made (ignoring any claims made for accounting periods beginning before 1 April 2024, but including any other forms of de minimis aid received by the company/group from the UK). Note the €300,000 limit applies to the additional relief received under ERIS insofar as it exceeds the net benefit of an equivalent claim made under the merged scheme.

This applies to claims made on or after 30 October 2024 by companies with a trade in goods, or a trade which involves the generation, transmission, distribution, supply, wholesale trade or cross-border exchange of electricity.

Any amounts in excess of the cap will be eligible for relief under the merged scheme, but the usual restrictions on relief for overseas spend on contracted out R&D and externally provided workers will apply. Businesses with no trade in goods or relevant activities in relation to the electricity market can opt out of these provisions. Doing so would mean that the limit on the amount of relief claimed in a three-year period will not apply. However, the overseas restrictions will instead apply.