Enhanced R&D Intensive Scheme: Key Benefits

The Enhanced R&D Intensive Scheme (ERIS) is designed to help loss-making SMEs with high research and development (R&D) expenses. Available from 1 April 2023, it offers 27p for every £1 spent on qualifying R&D, which is 67% higher than the standard merged scheme rate. To qualify, SMEs must have at least 30% of their spending dedicated to R&D starting from 1 April 2024. Here's what you need to know:

• Higher Tax Credit: SMEs can claim a 14.5% cash credit, turning R&D losses into immediate funding.
• 30% R&D Intensity Threshold: From April 2024, the threshold drops from 40%, enabling more businesses to qualify.
• One-Year Grace Period: Companies falling below the threshold temporarily can still claim for an extra year.
• Unified Rules: ERIS aligns with the merged R&D tax framework, simplifying claims and removing restrictions on grant-funded R&D.
• Support for High-Risk Projects: Covers costs like staffing, software, and consumables, with a total deduction of 186% on qualifying costs.
• Exemptions for Overseas Spend: Relief for overseas R&D is limited but allowed where UK resources are unavailable.

This scheme is expected to benefit 5,000 more SMEs annually and deliver £1.8 billion in funding over five years. For precise claims, expert advisory services are highly recommended. See our ERIS claims FAQs for answers to common eligibility questions.

1. Higher Cash Credit Rate for Loss-Making SMEs

The Enhanced R&D Intensive Scheme (ERIS) offers a 14.5% tax credit, a notable increase compared to the 10% rate available to non-intensive loss-making SMEs under the standard merged scheme. This translates into a stronger cash return on qualifying R&D expenses. Not sure whether losses rule you out? See whether you can claim R&D tax credits as a loss-making company.

For early-stage businesses that are not yet profitable, traditional tax deductions often provide little immediate value. ERIS changes this by letting companies trade their R&D losses for a cash payment from HMRC. This cash injection can be reinvested into further innovation, which is particularly critical during the pre-revenue phase when securing private funding is often tough. Here’s how it works:

Qualifying companies can deduct 186% of their R&D costs (100% plus an 86% enhancement). For example, a £500,000 R&D spend effectively becomes £930,000, resulting in a cash payment of £134,850 at the 14.5% rate.

"The enhanced rate of credit protects the most innovative SMEs in key sectors such as life sciences from the significant rate reduction introduced for other SMEs." – Katy Long, Director, ForrestBrown

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2. Lower R&D Intensity Threshold

Starting from 1 April 2024, the Enhanced R&D Intensive Scheme becomes more accessible, thanks to a reduction in the R&D intensity threshold from 40% to 30% of total expenditure. This adjustment means businesses now need a smaller proportion of their spending to go towards R&D to qualify for the enhanced 14.5% cash credit.

This change is expected to benefit around 5,000 additional SMEs that previously didn’t meet the 40% requirement. By 2028–29, this broader eligibility could provide an extra £50 million annually to support businesses investing in R&D. This expansion not only helps more companies but also establishes a stronger platform for future benefits under the scheme.

To understand how this works, let’s break it down: R&D intensity is calculated by dividing qualifying R&D expenditure by total relevant expenditure. For example, if a company spends £300,000 on R&D out of £1,000,000 in total costs, its intensity is 30% - just meeting the new threshold. With this, the company can access the higher credit rate, receiving approximately £27 from HMRC for every £100 spent on R&D.

"A company is considered R&D intensive where its qualifying R&D expenditure is 40% or more of its total expenditure... For accounting periods beginning on or after 1 April 2024, the intensity threshold will be reduced from 40% to 30%." – HM Revenue & Customs

When calculating your intensity ratio, it’s important to include the aggregate R&D and total expenditure for all connected companies, even those overseas. Typically, total expenditure is based on figures from your profit and loss account, adjusted to add back certain tax-deductible costs and exclude non-deductible items like depreciation and payments to connected parties.

3. One-Year Grace Period for Meeting the Threshold

If your company hit the 30% R&D intensity threshold last year but falls short this year, you can still claim the 14.5% credit rate for one additional year. This grace period acts as a buffer against unexpected events - like unusual expenses or small fluctuations in spending - that might otherwise cause your company to drop below the required threshold.

To qualify, your company must have claimed the enhanced support during the previous 12-month accounting period. However, this grace period isn't available for first-time claims - you need to establish your R&D-intensive status first.

"The grace period will allow a company which fails to meet the intensity threshold, for example due to a one-off shock (such as exceptional items of expenditure) or small fluctuations in expenditure... to continue claiming enhanced support in that year." – HM Revenue & Customs

Using this grace period helps companies avoid frequent shifts between the enhanced and standard rates, which can simplify financial planning and accounting. This is particularly important because ERIS relief is reported below the line, while the merged scheme is reported above the line. Switching back and forth could create inconsistencies in your accounts and disrupt cash flow projections. The grace period supports smoother financial management by reducing these disruptions.

For long-term planning, consider timing major non-R&D investments - like buying equipment or relocating facilities - for the year following a successful R&D-intensive claim. This way, even if those investments temporarily lower your R&D intensity below 30%, you'll still benefit from the enhanced credit rate.

4. Integration with Merged Scheme Claims

Starting 1 April 2024, the ERIS and RDEC schemes will operate under the same set of qualifying expenditure rules. This change removes the need for businesses to navigate separate regulations when submitting claims, streamlining the entire process.

This unified approach simplifies compliance and ensures a consistent claim process across both schemes. Both now require the same digital "Additional information" form, which even covers contracted-out R&D. In such cases, the entity undertaking the R&D and bearing the financial risk can claim relief.

"Merging schemes will be a significant tax simplification. These include having a single set of qualifying rules and being able to remove the list of qualifying bodies." – HM Treasury

Another key improvement is the removal of restrictions on subsidised expenditure. For accounting periods starting on or after 1 April 2024, grant-funded R&D will no longer reduce relief, making calculations more straightforward.

If your R&D intensity hovers near the 30% threshold, the core qualifying criteria remain unchanged. However, you have the option to claim under the merged RDEC scheme instead. Keep in mind, though, that only one claim can be submitted for the same expenditure. While the qualifying rules are now the same, the method for calculating the credit still varies between the schemes.

5. Financial Protection for High-Risk Innovation Projects

The Enhanced R&D Intensive Scheme offers crucial financial support for high-risk innovation projects. Loss-making companies can access a 14.5% tax credit, providing a much-needed cash boost to help manage the significant commercial risks tied to these ventures.

This support is particularly valuable for pre-revenue companies that often struggle to secure traditional funding. HM Revenue & Customs highlights this challenge, stating: "The government recognises... the particular difficulties such SMEs face when raising capital, for example, in their pre-revenue phase, to support innovation". The scheme also addresses a key market gap, acknowledging that the societal benefits of R&D investment are four times greater than the private returns. This financial protection fits seamlessly into ERIS's broader framework of support for qualifying costs.

To help overcome funding difficulties, the scheme covers essential project expenses such as staffing, software, cloud computing, and consumables for prototyping. Companies can claim an additional 86% deduction on qualifying costs from their adjusted trading loss, resulting in a total deduction of 186%.

The government has pledged over £1.8 billion to this scheme over five years. With the threshold for eligibility dropping to 30% in April 2024, around 5,000 additional SMEs are expected to benefit. Research underscores the importance of this investment, showing that a 1% increase in total R&D spending can enhance multifactor productivity by approximately 0.15%.

6. Exemptions from Overseas Spend Restrictions

Starting 1 April 2024, ERIS will limit relief for overseas R&D costs - focusing on contracted-out work and external workers - except in situations where UK resources fall short. Below are the key scenarios and benefits tied to these exemptions.

Overseas R&D relief can still be claimed when UK facilities, specific geographical conditions, or the necessary technical expertise are unavailable. Rachel Moore, Partner at PwC, highlights the narrow scope of these exceptions:

"The exceptions are narrowly defined and businesses need to consider the impact of these changes on their claims and potentially consider a global approach to R&D claims".

For companies in Northern Ireland, standard restrictions on overseas third-party costs do not apply. However, any additional ERIS relief falls under de minimis state aid, which is capped at €300,000 over three years. Businesses not trading in goods or electricity market activities may choose to opt out, but doing so will activate the standard UK overseas spend restrictions.

To qualify for these exemptions, companies must submit the required Additional Information Form, explaining why the necessary expertise or facilities were unavailable domestically. Maintaining detailed and current records of overseas R&D activities is crucial for strengthening claims and meeting HMRC requirements.

Given the strict criteria, consulting R&D tax specialists is highly recommended. This is especially important for industries such as biotech or aerospace, where compliance with HMRC standards can be particularly complex.

7. Access to Expert Advisory Services

Navigating the complexities of ERIS requires more than just standard financial know-how. From calculating the 30% intensity threshold across connected companies to meeting strict pre-notification deadlines, the scheme's intricacies call for specialist expertise. This guidance can make the difference between basic compliance and fully leveraging the available relief.

Advisory firms like Zest R&D Tax Advisors play a crucial role in helping businesses pinpoint qualifying R&D activities and uncover costs that might otherwise go unnoticed by internal teams. They also handle the precise calculations of R&D expenditure ratios across connected companies, ensuring the full value of qualifying R&D spending is realised.

Missing the six-month pre-notification deadline can result in losing your claim entirely. Specialists ensure timely notification to HMRC and prepare the Additional Information Form, which now must include detailed technical information and project-specific cost breakdowns.

Beyond pre-notification, expert advisors provide robust support during HMRC reviews. They help defend claims against compliance checks, reducing potential disruptions. Additionally, they guide businesses in utilising the one-year grace period if R&D intensity temporarily dips below the 30% threshold, provided it was met in the previous period.

"This scheme can materially improve your funding position, but precision is key" – Jay Desai, Research and Development Tax Director at MHA.

With ERIS allowing loss-making SMEs to claim a total deduction of 186% on R&D costs, having expert support can turn your claim into a critical source of funding for businesses focused on innovation.

Conclusion

The Enhanced R&D Intensive Scheme offers a crucial financial boost for loss-making SMEs committed to innovation. With a 14.5% payable tax credit and total deductions equating to 186% of qualifying costs, businesses can receive £27 for every £100 spent on R&D. For pre-revenue companies grappling with limited funding options, this cash injection is a lifeline, enabling them to continue high-risk, high-reward projects.

This scheme directly addresses the hurdles faced by innovative SMEs. The introduction of the 30% intensity threshold broadens access, potentially benefiting around 5,000 additional SMEs. Additionally, the one-year grace period ensures that companies aren't penalised for temporary dips in R&D spending. Over the next five years, the government anticipates this initiative will channel over £1.8 billion to innovative firms, tackling the common issue of underinvestment in R&D.

However, accessing these benefits requires careful navigation. From calculating intensity ratios across connected entities to submitting detailed digital information on time, the process can be intricate. Each year, approximately 39,000 loss-making SMEs must meet these requirements, and errors could lead to rejected claims or HMRC scrutiny.

To ensure success, working with experienced advisors is key. Zest R&D Tax Advisors specialises in helping businesses identify qualifying costs, maintain compliance, and secure the best possible relief. Their expertise can turn the Enhanced R&D Intensive Scheme into a strategic tool, transforming a potentially daunting process into a streamlined source of funding for your innovation efforts.

With the right support, your business can unlock the full potential of this scheme, securing vital resources to push your R&D projects forward. By leveraging the Enhanced R&D Intensive Scheme effectively, you can focus on what matters most - delivering innovation and driving progress.

FAQs

What makes the Enhanced R&D Intensive Scheme different from the standard R&D tax credit scheme?

The Enhanced R&D Intensive Scheme provides more generous financial incentives than the standard R&D tax credit scheme. It’s tailored for SMEs that allocate a substantial share of their costs - over 30% - to R&D efforts.

This scheme is especially beneficial for early-stage or research-driven businesses. It offers higher payable credits and broader eligibility, making it easier for companies heavily engaged in innovation and development to qualify.

What expenses are eligible for the 186% deduction under the Enhanced R&D Intensive Scheme (ERIS)?

The 186% deduction under ERIS applies to expenses closely tied to research and development (R&D) activities. These can include:

• Employee wages: Salaries for team members directly working on R&D projects.
• Contractor fees: Payments made to external contractors for R&D-related tasks.
• Raw materials: Costs of materials used in creating prototypes or running experiments.
• Other necessary expenses: Additional costs that are essential to carrying out R&D activities.

This deduction aims to offer substantial financial relief for companies investing in R&D, even for those currently facing operational losses.

What are the requirements for claiming overseas R&D relief under the Enhanced R&D Intensive Scheme (ERIS)?

To access overseas R&D relief through ERIS, your business needs to meet the same fundamental criteria as for domestic R&D relief. Here's what that entails:

• SME Classification: Your business must qualify as a small or medium-sized enterprise (SME).
• Eligible R&D Expenditure: You must have incurred costs that qualify as R&D expenditure.
• R&D Intensity Threshold: For accounting periods starting on or after 1 April 2024, your R&D intensity must reach at least 30%. This threshold applies to qualifying expenditure incurred on or after 1 April 2023.

The R&D intensity threshold is calculated by comparing your qualifying R&D expenditure to your total expenditure. Meeting these criteria ensures your business can benefit from financial support for forward-thinking projects.

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• Enhanced R&D Intensive Scheme: Success Stories
• Misunderstanding R&D Costs: Common Issues
• RDEC vs ERIS: Prototyping Eligibility Explained