RDEC vs ERIS: Aerospace Sector Guide

Choosing between RDEC and ERIS can significantly impact your aerospace company's UK R&D tax relief. Here's what you need to know:

• RDEC: Available to all UK businesses, including large aerospace firms and SMEs. Offers a net benefit of 15p–16.2p per £1 spent on qualifying R&D. Best suited for profit-making companies or SMEs with low R&D intensity.
• ERIS: Designed for loss-making, R&D-intensive SMEs. Provides up to 27p per £1 spent on qualifying R&D. Eligibility requires R&D expenditure to be at least 30% of total costs and the company must be loss-making.
• Key Differences: ERIS delivers higher returns but has stricter eligibility criteria. RDEC is more widely accessible but offers lower financial returns.

Quick Comparison

Both schemes exclude most overseas subcontractor costs and require precise documentation. Selecting the right scheme depends on company size, financial status, and R&D spending. Consulting with experts can help you maximise benefits and ensure compliance.

RDEC: What It Means for Aerospace Companies

What is RDEC?

The Research and Development Expenditure Credit (RDEC), effective from 1 April 2024, is an above-the-line credit shown as income in company accounts. A notable change is that government grants or subsidies no longer reduce the RDEC claim. This means aerospace companies can now benefit from both without limitations. But which aerospace companies qualify for RDEC?

Which Aerospace Companies Can Claim RDEC?

RDEC is available to large aerospace companies and certain SMEs. Large companies - defined as having 500 or more employees and either over £100 million in turnover or £86 million in gross assets - must claim under RDEC. SMEs that are either profit-making or loss-making but do not meet the R&D intensity threshold for ERIS are also eligible.

For companies working within intricate supply chains, the responsibility to claim falls on the entity initiating the R&D work, usually the prime contractor.

"HMRC has stated that 'intended or contemplated' goes beyond mere awareness that R&D will take place and requires a specific appreciation of what R&D will be done." - Ian Rowland, Partner, Grant Thornton

This makes it crucial for aerospace primes and their supply chain partners to clearly define, in their agreements, who has the right to claim the relief.

How the RDEC Credit Works

To understand the financial impact, it’s important to break down how the credit operates. The gross RDEC rate is set at 20% of qualifying R&D expenditure. After applying the 25% Corporation Tax, the net benefit equates to roughly 15p–16.2p for every £1 spent on eligible R&D. Companies at the small profits rate of 19% or those that are loss-making benefit from the higher end of this range.

Qualifying costs include:

• Staff wages
• National Insurance and pension contributions
• Software licences
• Cloud computing expenses
• Consumables
• Subcontracted R&D (subject to contracted-out rules)

However, costs related to overseas subcontractors are typically excluded unless the R&D work cannot be performed in the UK due to specific geographical, environmental, or regulatory constraints.

The RDEC is first used to offset any current Corporation Tax liability. Any remaining balance can be applied to other liabilities or, if eligible, paid out as a cash refund. Importantly, all claims must include a digitally submitted Additional Information Form (AIF), which is required before filing the Company Tax Return. For first-time claimants, a claim notification must be submitted within six months after the end of the accounting period.

sbb-itb-8ea0335

ERIS: R&D Support for Aerospace SMEs

The ERIS scheme is specifically tailored to support smaller aerospace SMEs that are heavily invested in R&D, standing in contrast to the RDEC scheme, which is aimed at larger companies. This programme applies to accounting periods starting on or after 1 April 2024. Below, we explore the eligibility criteria, benefits, and unique characteristics of ERIS.

Who Qualifies for ERIS?

To qualify for ERIS, an aerospace company must have fewer than 500 employees and meet one of the following financial thresholds: a turnover under £100 million or a balance sheet total below £86 million. Additionally, the company must be loss-making prior to applying the extra R&D deduction and have qualifying R&D expenditure accounting for at least 30% of its total costs (including those of connected or partner companies).

There’s also a helpful one-year grace period: if your company met the 30% R&D intensity threshold and successfully claimed ERIS in the previous year, you can still apply in the current year even if your R&D intensity drops below 30%.

How ERIS Benefits Aerospace SMEs

ERIS provides a substantial financial boost to eligible SMEs. It allows an additional 86% deduction on top of the standard 100%, resulting in an effective R&D expenditure rate of 186%. For loss-making companies, this enhanced deduction can be surrendered for a tax credit at 14.5%, equating to up to 27p for every £1 spent on qualifying R&D activities.

"The government recognises the value of R&D intensive SMEs to the UK's wider innovation ecosystem, and the particular difficulties such SMEs face when raising capital... in their pre-revenue phase." - HM Revenue & Customs

This benefit is particularly impactful for early-stage aerospace SMEs working on cutting-edge projects, such as new propulsion systems, advanced composite materials, or UAV technologies. These firms often face significant challenges in securing funding during their pre-revenue stages, making the ERIS scheme an essential lifeline. However, success depends on knowing how to submit R&D claims to HMRC correctly.

What Makes ERIS Different

ERIS stands apart by specifically targeting loss-making aerospace SMEs, unlike the older SME scheme, which also catered to profit-making companies. Another notable feature is its flexibility in allowing claims even when government grants or subsidies are involved. However, it generally excludes R&D conducted overseas, except in specific cases. These distinctions make ERIS particularly relevant for aerospace firms navigating the complexities of R&D funding.

RDEC vs ERIS: Key Differences for Aerospace Companies

To better understand how RDEC and ERIS apply to aerospace companies, it's helpful to compare their features directly. While RDEC is available to all companies, ERIS is specifically tailored for loss-making, R&D-intensive SMEs, often offering a higher net cash benefit.

Comparison Table: RDEC vs ERIS

"The new RDEC will be available to all companies undertaking qualifying R&D activities, whereas the ERIS will only be available to loss-making R&D intensive SME companies." - Albert Goodman

This side-by-side comparison highlights the key distinctions, helping aerospace companies determine which scheme aligns with their circumstances.

Practical Points for Aerospace Claims

When it comes to aerospace companies, the first considerations are company size and profit status. For example, a large Tier 1 aerospace manufacturer producing airframe components would typically fall under RDEC. On the other hand, an early-stage UAV startup investing heavily in propulsion testing could qualify for ERIS, as long as its R&D expenditure meets the 30% intensity requirement (lowered from 40% for accounting periods starting on or after 1 April 2024).

Subcontracting is another critical factor, especially in aerospace, where complex supply chains are common. Under both RDEC and ERIS, the ability to claim usually rests with the customer – the entity that planned or anticipated the need for R&D – rather than the subcontractor performing the work. For instance, if a large aerospace prime defines a technical problem and hires an SME to resolve it, the prime holds the right to claim, leaving the SME unable to access ERIS benefits.

Finally, UK-based R&D is now the standard. Both schemes restrict claims for overseas subcontractors unless there are specific UK-related constraints. Aerospace companies involved in activities like high-altitude testing or working with international regulatory bodies on certifications must carefully evaluate any exceptions to this rule.

Choosing the Right Scheme for Your Aerospace Project

Factors That Affect Scheme Selection

When deciding on the best scheme for your aerospace project, start by evaluating your company's size, profitability, and R&D expenditure intensity. For aerospace SMEs that are loss-making and meet the SME thresholds (fewer than 500 employees, turnover under £100 million, or a balance sheet total under £86 million), the ERIS scheme might be an option. However, from 1 April 2024, this is only available if qualifying R&D expenditure accounts for at least 30% of your total expenditure. For profitable companies or those with lower R&D spending levels, RDEC is usually the better choice. To ensure you're making the most of available relief, it's worth running calculations for both schemes.

Keep in mind that ERIS eligibility is assessed on a group basis. If your company is part of a larger group, you'll need to combine the staff, turnover, and balance sheet figures of all linked or partner enterprises. This can sometimes push your company out of the SME category, making ERIS unavailable. For example, a subsidiary of a large aerospace group may be classified as a large company, which means only RDEC would apply. These factors are key to determining which scheme offers the best cash benefit.

For companies with small losses or lower qualifying R&D expenditure, ERIS may not provide the greatest return. Dual calculations for both ERIS and RDEC are essential to identify the optimal approach.

"A company with small losses and relatively low qualifying spend will find that their tax benefit is higher through RDEC than ERIS. It's therefore vital to check the tax benefit available through both schemes."

Additionally, if your company is close to the 30% intensity threshold but expects to fall below it in the next year, it could still make sense to claim ERIS now to take advantage of grace period benefits. Timing is critical, and a single accounting period can have a big impact on which scheme provides better results.

Given these considerations, consulting with experts can simplify the process and help you make informed decisions.

How Zest R&D Tax Advisors Can Help

Navigating the complexities of RDEC and ERIS rules can be challenging, especially in the aerospace sector, where factors like supply chain arrangements, grant funding, and overseas operations often complicate eligibility. Zest R&D Tax Advisors specialise in helping UK aerospace companies optimise their claims. They provide tailored support to identify the most suitable scheme for your circumstances, prepare detailed claims, and ensure compliance with HMRC requirements.

One critical aspect they handle is the Additional Information Form (AIF), which must be submitted before filing your tax return - without it, your claim will be rejected. From assessing eligibility to submitting claims, Zest offers end-to-end support, giving aerospace businesses confidence that their claims are accurate and that they’re receiving the full relief they’re entitled to.

Conclusion: Getting the Most from R&D Tax Relief in Aerospace

The choice between RDEC and ERIS isn’t just a technical distinction - it directly affects your financial outcomes. The Merged Scheme (RDEC) offers a net cash benefit of around 15p to 16.2p per £1 of qualifying R&D spend. In contrast, ERIS can provide up to 27p for every £1 spent, especially benefiting loss-making SMEs. For the aerospace sector, where costs are high, this difference can be a game-changer.

Another critical point is that grants or subsidies don’t reduce your entitlement to R&D tax relief under either scheme. This is particularly relevant for aerospace businesses, which often rely on public funding and innovation grants.

"Forward-thinking businesses now have the opportunity to combine different incentives such as grant funding and Patent Box relief to optimise their innovation funding." - ForrestBrown

This insight highlights the shifting landscape of funding opportunities in aerospace. However, with stricter requirements like mandatory Additional Information Forms, tight pre-notification deadlines, and increased HMRC scrutiny, making it vital to know how to respond to HMRC enquiries should they arise, submitting a precise and well-documented claim has never been more important. HMRC reported a 21% drop in R&D claims during the 2022–23 tax year, emphasising the need for diligent record-keeping and timely submissions.

To maximise your claim, assess your eligibility early and consider seeking expert advice. Zest R&D Tax Advisors can help ensure your claim is accurate, compliant, and positions your aerospace innovation for the financial support it deserves.

FAQs

How do I calculate my R&D intensity for ERIS?

To work out your R&D intensity for ERIS, you need to divide your eligible R&D expenditure by your total relevant expenditure for the accounting period. Make sure to include costs from all connected companies, such as staff wages, contractor fees, and materials used for prototypes.

Here’s the formula:

R&D Intensity = (Eligible R&D expenditure / Total relevant expenditure) × 100%

Your result must be at least 30% to meet the qualification criteria for ERIS.

Can I claim if my aerospace R&D uses overseas subcontractors?

Yes, it’s possible to claim R&D tax relief for overseas subcontractors, provided your company retains control over the key decisions and adheres to HMRC’s contracted-out rules. You’ll also need to demonstrate that replicating the work within the UK would be entirely unreasonable. Make sure all HMRC conditions for overseas R&D activities are fully satisfied to qualify.

What documents do I need for the AIF and HMRC scrutiny?

To comply with HMRC requirements, you’ll need to provide the Additional Information Form (AIF), a Claim Notification Form (if applicable), and supporting documents. These could include technical reports, timesheets, invoices, payroll records, and project documentation. Make sure every document is thorough and accurate to withstand HMRC's scrutiny.

Related Blog Posts

• SME vs Large Company R&D Claims Compared
• Enhanced R&D Intensive Scheme: Success Stories
• RDEC vs ERIS: Prototyping Eligibility Explained
• RDEC vs ERIS: Key Differences