What are the main differences between ERIS and the R&D Merged Scheme?

ERIS and the Merged Scheme are both available for qualifying R&D expenditure incurred in accounting periods beginning on or after 1 April 2024. While both provide R&D tax relief, they differ in their eligibility requirements and the way the relief is calculated.

The Merged Scheme replaced the previous legacy SME and RDEC regimes with a single R&D expenditure credit for most companies. In contrast, ERIS preserves the enhanced deduction structure of the old SME scheme, offering targeted relief specifically for loss-making small and medium-sized enterprises (SMEs).

The primary distinction lies in the type of business that can benefit from the enhanced ERIS treatment. ERIS is restricted to loss-making SMEs whose relevant R&D expenditure represents at least 30% of their total relevant expenditure. Where applicable, expenditure relating to connected companies must also be taken into account when applying the intensity test.

ERIS also includes a one-year grace period for certain companies that fall below the 30% intensity threshold. This can allow a company that met the intensity condition in its previous 12-month accounting period to continue qualifying for ERIS for a further period, provided the other grace-period conditions are met. These include requirements relating to the company’s previous R&D relief claim.

The method of calculating the financial relief also differs between the two regimes:

Under ERIS:

A qualifying company receives an additional deduction equal to 86% of its qualifying R&D expenditure, giving an enhanced expenditure amount equal to 186% of qualifying expenditure. Where sufficient loss is available to surrender, the 14.5% payable credit can produce a maximum potential payable credit equal to 26.97% of qualifying expenditure, before considering restrictions such as the PAYE cap.

Under the Merged Scheme:

Relief is provided through a taxable expenditure credit at a headline rate of 20%. For a loss-making company, a 19% notional tax rate applies at the relevant step in the calculation. This can produce a post-tax credit equivalent to 16.2% of qualifying expenditure, although the amount ultimately received will depend on the company’s circumstances and the Merged Scheme’s payment steps.

This difference can be particularly relevant for loss-making, R&D-intensive SMEs, as ERIS can provide a higher rate of relief where the relevant conditions are met.

Both schemes also contain rules governing qualifying expenditure, including restrictions relating to overseas expenditure and contracted-out R&D:

• Overseas Restrictions: Both schemes restrict certain payments for overseas contractors and externally provided workers. Overseas expenditure may still qualify where the statutory conditions for the overseas expenditure exception are met.
• Contracted-Out R&D: Both schemes contain rules determining which company can claim where R&D is contracted between businesses. Broadly, the company that decides to undertake or initiate the R&D will generally be entitled to claim, although the outcome depends on the contractual arrangements and the specific circumstances.

Businesses should establish whether they meet the ERIS eligibility conditions before making a claim under the Merged Scheme. Where the ERIS conditions are satisfied, the company can choose between the two regimes, but the same expenditure cannot be claimed under both.

Companies should maintain appropriate financial and technical records to support their R&D claim. Under both ERIS and the Merged Scheme, an Additional Information Form (AIF) must be submitted to HMRC before the Company Tax Return containing the R&D claim. The AIF provides HMRC with information about the qualifying R&D projects and the expenditure included in the claim. Before calculating the relief available, businesses should establish which scheme applies and, for loss-making SMEs, whether the ERIS eligibility requirements have been met.