ERIS Regulation Changes 2026

Q: How do I calculate my ERIS R&D intensity at 30%?

To determine your ERIS R&D intensity at 30%, take your qualifying R&D costs - this includes expenses like staff wages, payments to subcontractors, and materials - and divide them by your total company expenditure for the relevant accounting period. Then, multiply the result by 100 to convert it into a percentage. If this percentage reaches 30% or more, your company qualifies for ERIS eligibility. This offers additional relief specifically designed for SMEs with a strong focus on R&D activities.

by Adam Park | March 1, 2026

The 2026 updates to the Enhanced R&D Intensive Scheme (ERIS) make it easier for UK SMEs to claim R&D tax relief. Here's what you need to know:

Lower R&D Threshold: The R&D intensity threshold is now 30% (down from 40%), allowing more businesses to qualify.
One-Year Grace Period: Companies falling below the 30% threshold temporarily can still claim if they met it the previous year.
Subsidised R&D Now Eligible: Restrictions on claiming for subsidised R&D have been removed, simplifying access to relief.
PAYE/NIC Cap Changes: A cap applies to tax credits, but exemptions exist for certain companies.
Overseas Expenditure Limits: Payments for overseas R&D are restricted unless specific conditions are met.

These changes aim to improve access while maintaining compliance requirements. Eligible businesses can claim up to £27 for every £100 spent on R&D. Staying compliant involves tracking R&D spend, ensuring loss-making status, and meeting HMRC deadlines.

ERIS 2026 Regulation Changes: Key Updates for UK SMEs

Main Changes to ERIS Regulations in 2026

The 2026 updates to ERIS bring three key adjustments aimed at making the scheme more accessible and practical for SMEs focused on R&D. These changes address challenges like fluctuating R&D spending and funding complexities, offering smoother compliance and improved financial support. Here's a closer look at these updates:

Lower R&D Intensity Threshold

One of the standout updates is the reduction of the R&D intensity threshold from 40% to 30% of total expenditure. This change applies to accounting periods starting on or after 1 April 2024. Now, businesses qualify for ERIS if their R&D spending makes up at least 30% of their total relevant expenditure. This adjustment opens the door for more SMEs to benefit from the enhanced 186% deduction and the 14.5% payable tax credit.

New One-Year Grace Period

A one-year grace period has been introduced to help businesses manage fluctuations in their R&D spending. If a company met the 30% threshold in the previous 12-month accounting period and made a valid SME or ERIS claim for R&D costs incurred after 1 April 2023, they can continue claiming under ERIS even if their current year’s R&D intensity falls below 30%. This provides a much-needed safety net for businesses navigating temporary dips in their R&D activity, which often occur during shifts in project phases or changes in operational costs.

Removal of Subsidised R&D Restrictions

Restrictions on subsidised R&D expenditure have been completely removed, allowing SMEs to claim ERIS credits even if their projects have received grants or other subsidies. This simplifies access to multiple support schemes and removes the previous requirement to demonstrate no direct link between customer payments and specific R&D spending. By eliminating this hurdle, SMEs can focus more on innovation without worrying about complex compliance rules.

Other Regulatory Changes in 2026

Beyond the major ERIS updates, there are new rules affecting PAYE/NIC caps, subcontractor claims, and overseas expenditure.

PAYE and NIC Cap Adjustments

Both the ERIS and the merged RDEC schemes now include a cap on payable tax credits, similar to the SME-style PAYE and NIC cap. This cap is calculated as £20,000 plus 300% of the company’s relevant PAYE and National Insurance contributions for the accounting period. For shorter accounting periods, the £20,000 buffer is adjusted proportionally.

Under ERIS, any claims exceeding the cap are disallowed and cannot be carried forward. However, the merged RDEC scheme allows excess credit to be carried forward into the next accounting period. There are exemptions for companies that meet the "IP test" or where spending on connected subcontractors accounts for 15% or less of total R&D expenditure.

For companies with minimal payroll, such as director-only businesses or startups, the £20,000 buffer may represent their main allowance. These businesses should carefully assess how the cap impacts their claims. These changes set the stage for further updates to subcontractor and overseas expenditure rules.

Changes to Subcontracted R&D Claims

The 2026 regulations also introduce refinements to subcontracting claims. Relief now depends on the "decision-maker principle" - the company directing and initiating the R&D is entitled to claim, rather than the subcontractor performing the work. If the agreement explicitly anticipates R&D, the work is considered subcontracted.

For unconnected subcontractors, claims are capped at 65% of the payment made. For connected subcontractors, relief is limited to the lower of the payment made or the actual R&D expenditure incurred by the subcontractor. Subcontractors can only claim if the principal is an ineligible body (such as a charity, university, or overseas corporate not subject to UK tax) or if a joint election is made within a UK group.

Restrictions on Overseas Expenditure

Both ERIS and the merged RDEC schemes impose strict limits on payments for overseas externally provided workers (EPWs) and subcontractors. Payments for EPWs qualify only if they are subject to UK PAYE, and subcontractor costs are allowable only if the work is physically carried out within the UK (England, Scotland, Wales, and Northern Ireland).

Exemptions are granted only in cases where replicating UK conditions would be deemed entirely unreasonable. However, HMRC explicitly states that the cost of R&D or the unavailability of local workers does not qualify as valid grounds for an overseas exemption. Companies based in Northern Ireland claiming ERIS are generally exempt from these overseas restrictions, provided they do not opt out of the special Northern Ireland provisions.

These measures aim to simplify claim processes and bring ERIS more in line with the overarching goals of R&D relief.

What These Changes Mean for UK Businesses

The recent ERIS updates bring both opportunities and challenges for UK businesses. While the 2026 regulatory changes offer increased cash credits for qualifying SMEs, they also introduce stricter compliance requirements. To make the most of these benefits and avoid pitfalls, businesses need to fully understand the new rules and obligations.

Higher Cash Credits for Eligible Businesses

More SMEs now have access to higher cash credits. For R&D-intensive companies, this could mean receiving approximately £27 for every £100 of qualifying expenditure. In contrast, the merged RDEC scheme offers a benefit of around 15% to 16.2%.

"ERIS supports some of the UK's most innovative small companies. It offers qualifying companies R&D tax relief at a higher rate than the merged scheme. Tax credits worth up to 27% of the R&D expenditure can be achieved through ERIS claims." – PKF Francis Clark

For businesses that have received grants or subsidies, the ability to claim ERIS on the full qualifying spend is a game-changer. This can significantly improve cash flow, enabling reinvestment in operations, hiring new talent, or driving innovation forward. However, along with these financial benefits comes the responsibility to carefully monitor R&D intensity to remain eligible.

Tracking R&D Intensity and Staying Compliant

Eligibility under ERIS hinges on maintaining an R&D intensity of at least 30%. This calculation includes R&D and total expenditure from all connected companies worldwide - not just the claimant entity. To stay on track, businesses should monitor their R&D spending monthly, comparing it against GAAP-compliant total costs to spot any trends early.

If a company’s R&D intensity falls below the 30% threshold, a one-year grace period allows claims to continue, provided the previous 12-month requirement was met. Additionally, companies must remain loss-making before applying the R&D deduction, as this is a strict eligibility criterion. First-time claimants should also note that they must notify HMRC of their intent to claim within six months of the end of their accounting period, using the mandatory Additional Information Form.

These updates require careful attention to detail but offer meaningful rewards for businesses that can navigate the new landscape effectively.

Next Steps for SMEs

The 2026 ERIS regulation changes open up new possibilities for R&D-focused SMEs. With the lower 30% intensity threshold, a one-year grace period, and revised rules for subsidised R&D, accessing the scheme has become more feasible. However, strict compliance is essential. Here’s how to navigate these updates to secure your relief.

Start by calculating your R&D intensity. This involves dividing Relevant R&D Expenditure by Total Relevant Expenditure. If your business is connected to others, make sure to include their expenditure using consistent allocation methods. If your current intensity drops below 30%, check if you qualify for the one-year grace period.

Meeting deadlines is critical. New claimants must notify HMRC within six months of the period's end. A senior officer must endorse the claim, and you’ll need to submit the mandatory Additional Information Form. Submitting everything on time and in line with the rules is key to unlocking the full potential of these benefits.

"Now is the time to seek professional advice on R&D tax relief. Particularly for those small businesses and start-ups who suspect they will be affected negatively by these changes." – Adam Park, Zest Tax

How Zest R&D Tax Advisors Can Help

Navigating the 2026 ERIS changes can be complex, and this is where expert advice becomes invaluable. Zest R&D Tax Advisors specialise in helping SMEs calculate the 30% intensity threshold, especially when dealing with connected companies across multiple jurisdictions. They can also guide you in identifying qualifying costs, such as software licences, datasets, and cloud computing expenses, ensuring compliance with HMRC's strict record-keeping rules.

Zest’s expertise extends to clarifying the distinctions between Externally Provided Workers and subcontractor costs, which are subject to different rules and caps at 65%. They also ensure you meet pre-notification deadlines and submit fully compliant Additional Information Forms. With a free R&D consultation and a success-based fee structure, Zest makes professional support accessible for SMEs aiming to maximise their relief while staying compliant.

FAQs

How do I calculate my ERIS R&D intensity at 30%?

To determine your ERIS R&D intensity at 30%, take your qualifying R&D costs - this includes expenses like staff wages, payments to subcontractors, and materials - and divide them by your total company expenditure for the relevant accounting period. Then, multiply the result by 100 to convert it into a percentage. If this percentage reaches 30% or more, your company qualifies for ERIS eligibility. This offers additional relief specifically designed for SMEs with a strong focus on R&D activities.

Can I still claim if my R&D spend drops below 30% this year?

If your R&D spending dips below the 30% threshold this year, you can still claim R&D relief. The ERIS scheme provides a one-year grace period, ensuring companies remain eligible despite a temporary drop in their R&D expenditure.

How do the PAYE/NIC cap and overseas R&D limits affect my claim?

The PAYE/NIC cap sets a limit on the payable R&D tax credit to £20,000, plus 300% of the relevant PAYE and NIC liabilities. For loss-making companies, this can significantly restrict claims, with any excess amounts being carried forward to future periods. Additionally, restrictions on overseas R&D activities mean relief is reduced for work conducted abroad unless it can be shown that equivalent resources are unavailable within the UK. Together, these rules may reduce the total amount eligible businesses can claim.