While the Merged R&D Scheme simplifies your clients’ R&D tax relief by calculating it under one unified figure, the ERIS Scheme provides an alternative means of recovery for R&D intensive loss-making SMEs.
With its more generous rates, the ERIS Scheme exists to incentivise these SMEs to continue pushing forward with innovation.
It is worth considering the advice that you can give to your clients who may be around the threshold for ERIS to ensure that they can maximise their R&D tax relief.
Maximising R&D tax relief with the ERIS Scheme
The lowering of the qualification threshold will ensure that more SMEs can make the most of the ERIS scheme rather than making claims through the Merged Scheme.
Where once 40 per cent of an SMEs expenditure had to be on qualifying R&D to make them R&D intensive, that figure is now only 30 per cent for accounting periods starting on or after April 2024.
This expenditure works with a 12-month grace period wherein, if the expenditure dips below the threshold, the SME has a year to bring it back up before dropping out of the ERIS Scheme.
Under the ERIS Scheme, eligible loss-making SMEs can claim a 186 per cent enhanced deduction on qualifying R&D expenditure and receive a 14.5 per cent payable tax credit on their surrenderable losses.
Given the generosity of the ERIS Scheme, and the challenging position of being a loss-making SME, greater consideration should be given to whether your client crosses the threshold.
Your client may not be aware of all the things that are considered qualifying expenditures and thus may be underselling their eligibility for the ERIS Scheme.
While the wages of the competent professional working on the R&D and the costs associated with refining research or testing may be at the forefront of your client’s mind, there are other parts of expenditure that need to be considered.
A portion of the energy costs incurred by a company may qualify as R&D expenditure provided that it is correctly apportioned.
This consideration can also be expanded to cover any consumables that were destroyed or consumed during the process of R&D work.
If the materials involved in testing cannot be sold on and are not part of the final product, then they count as qualifying expenditure for R&D tax relief purposes.
While software is generally excluded from consumables, the time spent modifying APIs could qualify, provided it fits the usual criteria of R&D work.
If your client’s competent professional has other roles in the business besides R&D, it is worth having a thorough discussion with them to evaluate how much of their time is being correctly apportioned for R&D work.
They may be underselling the time spent conducting R&D work.
However, there is a risk that they may overestimate their time, and so a thorough understanding of their work, the difficulty of it, and the time spent doing it is essential for an accurate claim.
Why understanding expenditure matters
When considering SMEs who are on the threshold of being R&D intensive, it is worth understanding all of the ways they may fall to either side.
Some clients will over-estimate their R&D work and may be disappointed to find they are not included in the ERIS Scheme.
Some SMEs will have a pleasant surprise when they discover that they underestimated their R&D expenditure.
Working with a strong knowledge of the eligibility criteria positions us to effectively guide clients to maximise their R&D tax relief claims while remaining fully compliant.
It is worth noting that typically only stand-alone businesses can benefit from the ERIS Scheme.
This is because the 30 per cent threshold must take into account all expenditure, including any group companies, and may make them fall below the threshold even if they would qualify on their own.
SMEs on the ERIS threshold may face additional scrutiny concerning which scheme they have filed for, so having a robust defence prepared in case the claim is flagged by the Mandatory Random Enquiry Process is essential.
This can only be achieved by fully understanding your client’s expenditure and the HM Revenue and Customs guidelines.
