Loss-making SMEs that are R&D intensive can claim enhanced R&D intensive support, ERIS, instead of the merged scheme. ERIS keeps the shape of the old SME relief: an additional deduction from profits, and for a company with a loss, the option to surrender the loss for a payable credit. It is worth more than the merged scheme to the companies it targets, which are typically early-stage science and technology businesses spending most of their money on research before they have revenue.
What it is
| Feature | ERIS rule |
|---|---|
| Applies to | Accounting periods beginning on or after 1 April 2024 |
| Who | Loss-making SMEs whose relevant R&D expenditure is at least 30% of total relevant expenditure |
| Benefit type | An additional deduction and a payable credit |
| Deduction | An extra 86% of qualifying costs, a total deduction of 186% |
| Payable credit | Up to 14.5% of the surrenderable loss |
| Cash value | Up to 26.97% of qualifying expenditure where the whole enhanced expenditure is surrendered (186% multiplied by 14.5%) |
| Cap | Payable credits are capped at £20,000 plus 300% of relevant PAYE and National Insurance liabilities, with the same intellectual property exemption as the merged scheme |
| Grace period | A company that met the intensity condition in the previous period but falls below 30% keeps ERIS for one year |
| Procedure | As for the merged scheme: notification where required, additional information form, claim in the Company Tax Return |
Who it applies to
SME. A company is an SME if, with its linked and partner enterprises, it has fewer than 500 employees and either turnover of no more than €100 million or a balance sheet total of no more than €86 million. The thresholds are those of the EU definition with the staff and financial limits doubled, and investment by venture capital and certain institutional investors is disregarded in the linkage tests.
Loss-making. The company must have a trading loss for the period before the additional deduction is taken into account, or after it; the relief is available to the extent of the surrenderable loss.
R&D intensive. Relevant R&D expenditure must be at least 30% of total relevant expenditure. Relevant R&D expenditure is the qualifying R&D spend of the company and its connected companies; total relevant expenditure is the total expenditure deducted in calculating profits, with certain adjustments, again across the connected group. The threshold was 40% for accounting periods beginning on or after 1 April 2023 and before 1 April 2024 under the predecessor relief, and 30% from 1 April 2024.
How it works
- Compute qualifying expenditure in the ordinary way.
- Deduct an additional 86% of that expenditure in computing the trading result, giving a total deduction of 186%.
- If the result is a loss, identify the surrenderable loss: the lower of the unrelieved trading loss and the enhanced expenditure.
- Choose how much of the surrenderable loss to surrender for a payable credit at 14.5%, applying the PAYE and National Insurance cap; any loss not surrendered is carried forward in the ordinary way.
- Claim in the Company Tax Return with the additional information form.
As under the merged scheme, a payable credit requires the company to be a going concern on the basis of its latest published accounts, and the PAYE and National Insurance cap applies with the same intellectual property exemption. Because the credit is 14.5% of the surrendered loss rather than a percentage of expenditure, the cash depends on the size of the loss. A company with a small loss and large R&D spend may surrender less than its enhanced expenditure; a company with no loss at all claims the merged scheme instead.
Worked example
Illustrative example. Wren Therapeutics, a hypothetical SME, has qualifying expenditure of £1,000,000 and total relevant expenditure of £2,000,000 (intensity 50%), a trading loss before R&D relief of £1,200,000, and relevant PAYE and National Insurance of £150,000.
| Step | Amount |
|---|---|
| Additional deduction: 86% of £1,000,000 | £860,000; enhanced expenditure £1,860,000 |
| Trading loss after the deduction | £2,060,000 |
| Surrenderable loss: lower of £2,060,000 and £1,860,000 | £1,860,000 |
| Payable credit: 14.5% of £1,860,000 | £269,700 |
| Cap: £20,000 plus 300% of £150,000 | £470,000, not binding |
| Cash received | £269,700, 26.97% of qualifying expenditure |
| Loss carried forward | £200,000 |
Under the merged scheme Wren, as a loss-making company, would have received a net 16.2%, £162,000. ERIS is worth £107,700 more to it. The comparison runs the other way for a profitable company, which gets nothing from ERIS and 15% net from the merged scheme at the main rate.
Common questions
We are just under 30%. Is there any flexibility? Only the one-year grace period, for a company that met the condition in the previous period. Otherwise the merged scheme applies.
Does the intensity test include our group? Yes. Connected companies' R&D and total expenditure are included on both sides of the ratio.
Can we choose the merged scheme instead? A company that meets the ERIS conditions may claim the merged scheme instead; it is a choice made in the return.
Related pages
Official sources
Educational content only, not tax advice. See the disclaimer.