What we've learned from the first claims under ERIS

Claims for the new rate of enhanced relief for R&D-intensive SMEs began in April 2024 for post-1 April 2023 periods. Two years on, Sarah Jackman asks ForrestBrown director and SME business lead, Tom Jones, how it is working in practice

R&D tax relief has changed significantly following the introduction of the merged scheme in April 2024. It affected claimants of all sizes, including loss-making R&D-intensive SMEs, which now benefit from a new rate of enhanced relief, worth up to 27%. This Enhanced R&D intensive support (ERIS) is designed to reward highly R&D intensive SMEs for investing in innovation.

To be eligible, businesses must be an SME, make a loss in the period and meet the R&D intensity threshold. This was set at 40% for expenditure incurred on or after 1 April 2023, then lowered to 30% for accounting periods beginning on or after 1 April 2024. For accounting periods starting on or after 1 April 2024, businesses also need to be loss making pre-R&D.

According to the latest government statistics, a significant number of businesses are making use of the scheme. Of the overall number of loss-making SMEs accessing R&D tax relief in the 2023/24 tax year, around 20% did so under ERIS.

While the change in eligibility criteria may cause the figures to shift over time, it remains a powerful incentive for SMEs with high R&D intensity. Knowing how it works and ensuring that your eligibility is being calculated properly under the intensity threshold will be key to accessing it and unlocking opportunity.

Tom Jones answers the key questions that all SMEs need to know.

How valuable is enhanced R&D intensive support compared to standard R&D tax relief?

ERIS is worth up to 27 pence for every pound of qualifying expenditure identified, compared to 16 pence for loss-making businesses under the merged scheme. This makes ERIS significantly more valuable for SMEs who are eligible.

Although businesses are aware of changes to the relief, we often find that when they are looking to initiate a claim for the period post-1 April 2024, greater clarity is needed. Queries often relate to the calculation mechanism under the merged scheme, and whether they will qualify (or remain qualifying), for ERIS. A business might have been intensive in their pre-merged scheme claim and want to confirm whether they will still be intensive for their post-1 April 2024 claim.

Our advice, particularly for larger SMEs, is to start discussing any post-1 April 2024 claim ahead of time. This will ensure clarity over scheme eligibility – enabling you to meet the relevant deadlines and claim with confidence.

How can SMEs determine whether they are R&D intensive and eligible for enhanced relief?

Businesses need to consider what proportion of their overall expenditure relates to R&D. For example, does the workforce have a significant number of R&D staff as a ratio to the overall number of staff? Similarly, do third parties represent a significant proportion of its R&D spend?

Where third parties do represent a significant proportion of its R&D spend, the overseas restrictions will need to be considered, as they might affect what can be claimed. In this scenario, we recommend consulting a specialist R&D adviser that can provide guidance on how the overseas restrictions apply and the impact on the intensity calculation.

In scenarios where a business has a combination of R&D expenditure that part sits on the P&L and part on the balance sheet because some of it has been capitalised as an intangible fixed asset, we also recommend seeking specialist support. This is to ensure that all costs are being accurately recorded to fully optimise your claim and protect you from risk.

What are common eligibility mistakes R&D-intensive SMEs make when claiming tax relief?

Complexity often occurs when there are overseas subsidiaries or companies where they’re owned by an individual group or individuals that own multiple other businesses as well. It’s vital to ensure that your company’s structure has been properly accounted for, protecting you from risk should HMRC question the intensity calculation.

We often see companies wrongly assume that they’re R&D intensive based on their understanding of the calculation. They might do an assessment of what they think qualifies, but when we go through their R&D process, that often changes. For example, certain project costs may be discounted for qualification reasons.

As an adviser, we help businesses to understand their position in relation to connected companies (both UK-based and overseas) and which scheme they will qualify for. We work closely with you to review your projects, identify which scheme is right for your business, and explain the reasons why.

Can businesses transition to and from ERIS if the R&D intensity fluctuates around the qualifying threshold?

There is a year-of-grace transitional provision, which aims to simplify the process for businesses. If they meet the intensity threshold in the first year, then drop below it, they can move back above it in the third year.

It is intended to avoid a flip-flopping between the two schemes. Inevitably though, as businesses grow and become profitable, early-stage loss-making start-ups that were accessing ERIS, will move out of it.

Our experience suggests that awareness is lacking on the transitional provisions. Businesses are generally aware of ERIS, but often unaware that the year-of-grace provision may apply to them. To clarify whether your business is affected by the transitional provisions, enlist the support of an expert adviser.

Can changes in R&D intensity year to year put R&D tax relief claims at risk? If so, how can I protect myself?

While claims under ERIS don’t carry a particular known risk, we have highlighted the emergence of ERIS letters in our recent blog on the HMRC compliance landscape, by Phil Smith.

ERIS letters typically ask for more information about how a business has calculated the R&D intensity threshold, particularly where the figures don’t align with those given on the additional information form, or where there are connected companies, especially outside the UK.

Our advice is to prepare claims thoroughly, keep records rigorously and employ an expert adviser to review your claim prior to submission. Advisers such as ForrestBrown offer specialist enquiry support, ensuring that any compliance checks are resolved efficiently should HMRC raise a query.

Read our article on HMRC R&D tax letters to understand what different types of HMRC correspondence might look like.

Do businesses record costs and keep records differently under ERIS than the merged scheme?

The rules are the same for the two incentives, so businesses claiming the relief should follow the usual process before calculating the intensity. Once calculated, businesses will simply need to indicate that they’re making an ERIS claim on their additional information form (AIF) and Corporation Tax return.

It is helpful for businesses to keep track of R&D projects throughout the year and ensure that a proactive approach to capturing R&D is in place. This will help to provide visibility at an early stage, over which scheme you are likely to qualify for.

Which types of enhanced R&D expenditure can businesses include in an R&D tax relief claim?

Eligible R&D expenditure follows the same definition regardless of the incentive. Post-1 April 2024 though, businesses should be aware of the contracted-out position, to determine whose R&D it is and whether it can be claimed.

Since the rules on contracted-out R&D can be complex, we recommend seeking the advice of a specialist provider that knows the rules inside out and can ensure their proper application. ForrestBrown’s James Dudbridge has written extensively on overseas and contracted-out R&D. For a deep dive into either area, read our contracted-out and overseas articles.

What is the best way to track enhanced R&D expenditure for tax purposes?

Given that it’s the same incentive, but with a different rate, record-keeping good practice applies regardless of the rate being claimed. On that basis, maintain strong records that document your R&D spend and activities throughout the year.

You can learn more about record-keeping in our KnowledgeBank article.

Which sectors are most likely to qualify as R&D intensive?

High-R&D intensive businesses, particularly in their early stages, that sit within the government’s Industrial Strategy growth sectors are likely to qualify for ERIS. These include businesses in quantum computing, life sciences, defence, space and aerospace.

Of course, this list isn’t exhaustive, and we’ve certainly seen businesses in other sectors qualify. If in doubt, ask a specialist to give you a second opinion, especially if you’ve had a highly intensive period of R&D.

Should businesses seek external verification of our R&D intensity before filing a claim?

The enhanced rate of relief presents greater value to businesses, but the emergence of ERIS letters indicates that claims must be thorough and protected from risk. Engaging an experienced adviser to assess your eligibility for ERIS and prepare the claim on your behalf will help mitigate that risk and ensure that it has been fully optimised.

A trusted adviser will help you navigate other complexities too, such as the nuances of claiming where a connected company is involved or the rules on contracted-out R&D and overseas restrictions. A partner such as ForrestBrown can also advise on the relationship between R&D tax relief and other forms of non-dilutive funding – ensuring that you’re accessing the right funding at key stages in the business life cycle.

As with any new regime, there are pitfalls and challenges to be aware of – particularly in the first year of claiming. Having a trusted adviser on board who can help advise you on those, will put you in the best possible position to unlock opportunity.