Under the raft of changes that took place earlier this year, the Government introduced the new Enhanced R&D Intensive Support (ERIS) scheme for loss-making small and medium-sized enterprises (SMEs).
This is aimed at SMEs that are heavily invested in R&D to ensure that they can receive a more substantial tax benefit to reward their efforts.
This scheme helps to account for the pivotal merging of the previous SME and R&D expenditure credit (RDEC) scheme, which saw rates of relief fall for SMEs.
Eligibility for the ERIS scheme
Small and medium-sized enterprises (SMEs) may qualify for the Enhanced R&D Incentive Scheme (ERIS) if they meet specific criteria:
- R&D expenditure threshold: At least 30 per cent of the company’s total relevant expenditure must be on R&D activities.
- Loss-making status: The company must be loss-making before applying the additional R&D deduction.
The scheme only applies to accounting periods that begin on or after April 1, 2024. Previously, HMRC also introduced an R&D-intensive variation to the old SME scheme, which applied a higher intensity threshold of 40 per cent for expenditure incurred after April 1, 2023.
This has undoubtedly caused some confusion amongst some businesses and their advisers.
To account for companies that may temporarily fall below the 30 per cent threshold, ERIS provides a grace period so that if a company qualifies and claims ERIS in the first year but drops below the threshold in the subsequent year, it can still claim for the full period provided it remains loss-making.
Calculation of tax relief
The tax benefit calculation under ERIS mirrors the old SME scheme:
- 86 per cent enhancement to qualifying R&D expenditure
- Losses to be surrendered for a 14.5 per cent tax credit
Combined this results in a net credit of approximately 27 per cent. Be aware that smaller losses may reduce the combined benefit’s value, potentially making the merged scheme more advantageous for your clients.
New rules
The ERIS scheme introduces several other key changes as well, including:
- Subcontracted R&D: Companies can claim for subcontracted R&D expenditures as in the old SME scheme. However, they must provide definitive evidence that the R&D was initially intended or contemplated by them, not by the subcontractor.
- Overseas Expenditure: New rules restrict claims for overseas subcontracted work and externally provided workers (EPWs) unless it is demonstrated that the R&D conditions are unique to overseas locations and cannot be replicated in the UK.
- Subsidised expenditure: The ERIS scheme allows for subsidised expenditure, previously this expenditure was not allowable under the SME scheme.
The changes introduced by the ERIS scheme can be complex, reflecting significant updates in R&D regulations and practices over recent years.
If you would like to learn how we can help your practice keep pace with these changes, please get in touch.