ERIS Compliance: R&D Intensity Condition Explained

The Enhanced R&D Intensive Support (ERIS) scheme, effective from 1 April 2024, offers tax relief for loss-making UK SMEs focused on research and development. To qualify, your business must meet specific criteria, including spending at least 30% of total expenses on R&D during the accounting period. This threshold was previously 40% for periods starting between 1 April 2023 and 31 March 2024.

Key points:

• Tax Relief: 186% total deduction on qualifying R&D costs.
• Tax Credit: Up to 14.5% of surrenderable loss, non-taxable.
• Eligibility: SMEs with fewer than 500 employees, annual turnover under €100m, or balance sheet total under €86m.
• R&D Intensity Ratio: Calculated as total R&D expenditure divided by total relevant expenditure, including connected companies.

If your R&D spending falls short of the threshold, you must apply under the less favourable RDEC scheme. A one-year grace period may apply if the threshold was met in the previous year. Calculations must be precise to comply with HMRC rules.

Understanding the R&D Intensity Condition

What is the R&D Intensity Ratio?

The R&D intensity ratio is a statutory measure defined under CTA09/S1045ZA. It determines whether your SME qualifies as "R&D intensive". The formula for calculating the R&D intensity ratio (I) is:

I = (Total R&D Expenditure) / (Total Relevant Expenditure).

This calculation must factor in the expenditure of all connected companies, even if they are based overseas, provided they were connected to your business at any point during the accounting period.

For instance, in October 2025, Lera Accountancy assisted a loss-making SME with a year-end date of 31 October 2025. The company generated £37,000 in revenue but had total costs of £74,000, of which £45,000 were linked to qualifying R&D activities. Dividing £45,000 by £74,000 gives an intensity ratio of approximately 60%. Since this surpassed the 30% threshold applicable for periods beginning after April 2024, the company qualified for ERIS support and received an R&D tax credit of £10,975.50.

Let’s delve into the components of this calculation.

Components of the Calculation

The R&D intensity ratio consists of two key elements: the numerator (Relevant R&D Expenditure) and the denominator (Total Relevant Expenditure).

• Relevant R&D Expenditure (R): This includes qualifying costs such as staffing, software, Externally Provided Workers (EPWs), consumables, and subcontractor expenses. These costs align with "Chapter 2 qualifying expenditure".
• Total Relevant Expenditure (T): This is broader and includes all expenses reflected in your GAAP accounts. It also incorporates amounts eligible for R&D relief under CTA09/S1045 and deductions for intangible assets under CTA09/S1308.

Certain adjustments are necessary to avoid double-counting. For example:

• Payments or transfers of value to connected companies are excluded from the total relevant expenditure.
• Amortisation add-backs required under CTA09/S1308 are also omitted.

If connected companies have differing year-end dates, you must use a reasonable method - such as daily apportionment - to allocate their expenditure consistently within your accounting period.

Accurate calculations of these components are crucial to ensuring compliance with ERIS requirements.

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Eligibility Criteria and Intensity Thresholds

ERIS Eligibility Requirements

To qualify for ERIS, your company must meet these four key conditions:

• SME Definition: Your business must fit the SME criteria under CTA 2009, meaning fewer than 500 employees and either an annual turnover below €100 million or a balance sheet total under €86 million.
• Trading and Loss-Making: The company must be actively trading and recording tax losses before applying the 86% additional R&D deduction.
• Company Classification: Businesses classified as "ineligible companies", such as certain state-owned or tax-exempt entities, are excluded from eligibility.
• Qualifying Expenditure: Eligible expenses include staffing costs, software, consumables, and relevant subcontractor costs under Chapter 2.

Once these criteria are met, you’ll need to check the intensity thresholds specific to your accounting period.

Intensity Thresholds by Accounting Period

The R&D intensity thresholds depend on the start date of your accounting period:

• For periods beginning between 1 April 2023 and 31 March 2024, the threshold is set at 40%.
• For periods starting on or after 1 April 2024, the threshold is reduced to 30%.

To qualify for ERIS support, your R&D expenditure must meet or exceed the relevant percentage of your total qualifying expenditure.

Here’s a quick breakdown of the thresholds:

If your company meets the stricter 40% threshold, you can still claim retrospectively under the previous SME rules. Additionally, if you fail to meet the current threshold, a one-year grace period may apply, provided you met the threshold in the previous period and submitted a valid claim.

Compliance and Practical Guidance

Connected Companies and R&D Intensity

When dealing with group structures, you need to combine the figures of all connected companies, no matter where they are based, even if the connection lasted just one day. A connected company is defined as one where over 50% of the voting rights or share capital is controlled by another, or both are under the same control. This includes foreign entities. For example, if a UK claimant has a subsidiary in Germany, the subsidiary's expenditure must be factored into the intensity test.

To avoid double-counting, exclude intra-group recharges from total expenditure. For instance, if your company pays £100,000 to a connected entity for services, that sum should not be included in the denominator when calculating your intensity ratio. If connected companies have different year-end dates, you must use a consistent daily apportionment method to align expenditures. The chosen method should accurately reflect the economic dynamics of your group structure.

These adjustments are essential to ensure claims are accurate and compliant, especially when considering grace periods.

1-Year Grace Period for Non-Compliance

Falling below the threshold in the current period doesn’t necessarily disqualify you from ERIS. The rules allow for a one-year grace period, provided you met the threshold and submitted a valid claim in the previous 12-month accounting period. However, this grace period only applies if the previous accounting period was exactly 12 months long. If the prior period was shorter or longer, the grace period cannot be used. This provision offers a temporary cushion for growing companies experiencing higher non-R&D expenditure, but compliance must be restored in the following period to continue benefiting from ERIS.

Common Compliance Errors to Avoid

One frequent mistake is failing to include the expenditure of connected companies when applying the 30% intensity test. Businesses often focus solely on the claimant company, ignoring connected entities, which can lead to invalid claims and challenges from HMRC. Another common error involves misapplying the loss-making requirement. For periods starting on or after 1 April 2024, your company must be in a trading loss position before the additional 86% R&D deduction is applied. Assessing loss status after applying the deduction invalidates the claim.

Errors also arise when calculating the surrenderable loss. This is the lesser of your enhanced R&D expenditure (186% of qualifying costs) or your actual unrelieved trading loss after deducting any current-period sideways or group relief. Missteps in this calculation can lead to inaccurate claims.

"ERIS offers valuable support for R&D-intensive SMEs, but its application is conditional, structured, and highly dependent on a compliant and technically accurate calculation."

• Christopher Toms, Compliance Director, RandDTax

Ensure your intensity calculation includes precise AIF details, as these are mandatory for ERIS claims. Additionally, confirm that intra-group charges are excluded from total relevant expenditure and verify that your company does not fall into restricted categories, such as state-owned or tax-exempt organisations.

Conclusion and Next Steps

Key Takeaways

Here’s a brief recap of the compliance essentials for ERIS. From 1 April 2024, loss-making SMEs can benefit from enhanced R&D relief if at least 30% of their total expenditure is linked to R&D. This threshold takes into account the combined R&D and total expenditures of all connected companies, including those overseas. The relief comes in the form of a 14.5% tax credit, which can provide a meaningful cash benefit. If a company doesn’t meet the threshold in a given period, a one-year grace period applies - provided the previous year’s claim was valid and met the requirements.

It’s important to note that your business must record a trading loss before applying the additional 86% R&D deduction. The claim is capped at the lower amount between the enhanced expenditure and the unrelieved loss. To ensure compliance, you’ll also need to submit the mandatory Additional Information Form before filing your CT600 return.

These steps are crucial for building a strong, compliant claim under the ERIS framework.

How Zest R&D Tax Advisors Can Help

Navigating the complexities of ERIS compliance requires precision in calculating R&D intensity, identifying qualifying expenditures, and aggregating data across connected companies. Zest R&D Tax Advisors are experts in R&D Tax Relief schemes and can guide you through the technical requirements outlined in Chapter 2 of Part 13 of CTA 2009. Their services include everything from preparing claims and ensuring compliance to assisting with the mandatory Additional Information Form.

For businesses with intricate group structures, varying year-end dates, or uncertainty around qualifying expenditures, Zest’s advisors can work alongside your accountant to maximise your claim while staying within HMRC’s guidelines. Their percentage-based fee structure ensures you only pay if your claim is successful, making professional advice more accessible for businesses focused on R&D. Visit Zest R&D Tax Advisors to explore how they can help you secure the relief your innovative efforts deserve.

FAQs

What counts as “total relevant expenditure” in the 30% ERIS test?

Total relevant expenditure in the 30% ERIS test refers to all research and development (R&D) costs a company incurs during the accounting period. This includes spending aimed at resolving scientific or technical uncertainties. For companies linked to others, the calculation considers the combined R&D expenditure across all connected entities.

Do I need to include overseas connected companies in the intensity ratio?

When determining R&D intensity for ERIS, it's important to account for the expenditure of all connected companies, including those located overseas. This approach ensures that the total calculation accurately represents all relevant spending across the entire group.

Can I still claim ERIS if I miss the threshold this year?

To qualify for ERIS, you must meet the 30% R&D intensity threshold every year. If you fail to meet this requirement in any given year, you will not be eligible for the scheme.

Related Blog Posts

• Enhanced R&D Intensive Scheme: Success Stories
• Enhanced R&D Intensive Scheme: Key Benefits
• R&D Tax Relief: Eligible Costs for ERIS Claims
• ERIS Regulation Changes 2026