How does the ERIS scheme work and what costs can be included?

The Enhanced R&D Intensive Support (ERIS) scheme was designed for SMEs who are loss-making and have spent a significant proportion of their costs on research and development.

For accounting periods beginning on or after 1 April 2024, a business that meets the ERIS conditions can claim an extra 86% deduction for its qualifying R&D costs. The usual 100% deduction still applies, so the total deduction comes to 186%.

Example:

If your company spends £100,000 on qualifying R&D, you would receive the normal £100,000 deduction, plus a further £86,000 under ERIS. This gives a total enhanced expenditure of £186,000.

Where the business is making a loss, it may be possible to turn some of that loss into a payable tax credit. The amount available to surrender is generally restricted to the lower of the enhanced expenditure and the relevant trading loss after the additional R&D deduction has been taken into account.

Using the example above, a company with enough surrenderable loss could potentially surrender £186,000. At the 14.5% payable credit rate, this would result in a tax credit of £26,970. The amount a company can actually claim will depend on its individual tax position and the relevant limits.

The qualifying R&D expenditure used in the ERIS calculation can include:

• Staffing costs, such as salaries, employer’s National Insurance contributions and certain pension contributions for employees involved in qualifying R&D.
• Software costs for software used in qualifying R&D activities.
• Consumable items, such as materials, water, fuel and power that are consumed or transformed during the R&D process.
• Data licences and cloud computing costs used for qualifying R&D activities, subject to the relevant conditions.
• Externally provided workers (EPWs) who carry out qualifying R&D activities on behalf of the company.
• Subcontractor costs for certain qualifying R&D activities carried out by third parties, subject to the applicable ERIS rules.

The expenditure must relate to qualifying R&D activities and meet the specific rules for each cost category. Where a cost is only partly attributable to qualifying R&D, an appropriate proportion may need to be used.

It is worth noting that a business does not have to surrender the full amount available. The payable credit is also subject to the PAYE and National Insurance cap, unless the company falls within an exemption.

The ERIS calculation can therefore be looked at in two parts. The first is the enhanced deduction, which increases the amount of R&D expenditure taken into account when calculating the company’s tax-adjusted trading loss. The second is the payable credit, where an eligible loss can be surrendered in exchange for a cash payment from HMRC.

A company that meets the ERIS requirements can choose to claim under ERIS or the R&D Merged Scheme. However, the same R&D expenditure cannot be claimed under both. It is therefore important to look at the company’s circumstances and work out which treatment is most suitable before submitting the claim.

There are also a number of other requirements to consider when making an ERIS claim. As with other R&D tax relief claims, the company needs to provide HMRC with an Additional Information Form (AIF). In certain circumstances, it will also need to notify HMRC in advance that it intends to make an R&D claim.

The claim should clearly explain the R&D work being carried out, as well as showing how the figures have been calculated. This gives HMRC the information it needs to assess both the technical side of the claim and the amount of relief being requested.

The main difference between ERIS and the Merged Scheme is the way the relief is calculated. ERIS provides an additional deduction and, for eligible loss-making businesses, the option of a payable tax credit. The Merged Scheme instead provides relief through an expenditure credit.

For R&D-intensive SMEs that qualify for ERIS, it is worth understanding both options before deciding how to approach the claim.