RDEC vs ERIS: Avoiding Claim Errors

Confused about the UK’s updated R&D tax relief system? Here's what you need to know:

• From 1 April 2024, the SME and RDEC schemes were replaced by a merged RDEC-style scheme and a specialised ERIS scheme for loss-making, R&D-intensive SMEs.
• The merged RDEC scheme offers a net benefit of 15–16.2% for qualifying R&D costs. ERIS provides up to 26.97%, but only for SMEs meeting strict criteria.
• Common errors include:
  • Misjudging the 30% intensity threshold for ERIS.
  • Failing to submit the Additional Information Form (AIF) on time.
  • Incorrectly claiming under outdated rules or the wrong scheme.
• HMRC is scrutinising claims more than ever, with 20% of all R&D claims under investigation and 50% in high-risk sectors.

Key takeaway: Choosing the right scheme and avoiding claim mistakes can maximise relief and minimise risks. Proper internal controls and expert advice are critical to navigating these changes effectively.

Understanding RDEC and ERIS Schemes

The reforms introduced in April 2024 brought two distinct pathways for R&D tax relief. The merged RDEC-style scheme is now the default option for most companies, while ERIS (Enhanced R&D Intensive Support) is specifically designed for loss-making, R&D-focused SMEs. Choosing the right scheme is crucial.

The main difference lies in their objectives. ERIS aims to provide greater relief for loss-making companies heavily involved in R&D. As Albert Cabral, Assistant R&D Manager at RCK Partners, explains:

"HMRC recognised that there are loss‐making companies that are undertaking high‐intensity R&D projects would need a higher rate of relief to continue to innovate effectively".

While the merged scheme provides a net benefit of 15–16.2%, ERIS offers nearly 27p for every £1 spent. This difference highlights the importance of selecting the right scheme for SMEs. Below is a closer look at how each scheme works.

Merged RDEC-Style Scheme for SMEs

This scheme applies to accounting periods beginning on or after 1 April 2024 and functions as an "above-the-line" taxable expenditure credit. Companies can claim a 20% gross credit on qualifying R&D costs, which is then subject to Corporation Tax. For companies paying the 25% Corporation Tax rate, the net benefit is approximately 15%. Loss-making companies receive a slightly higher benefit of 16.2% due to a notional 19% tax rate.

A common mistake is assuming the pre-2024 SME scheme, which offered a 130% enhancement and more generous credits, still applies. Claims based on the old rules may face rejection or delays. Another frequent error involves misinterpreting the new subcontractor rules. Under the merged scheme, the ability to claim relief generally belongs to the party that "intended or contemplated" the R&D - usually the customer, not the contractor. Additionally, the scheme limits relief to R&D work physically conducted in the UK, with only a few exceptions for overseas contractors or externally provided workers.

ERIS for R&D-Intensive SMEs

ERIS offers enhanced benefits for loss-making SMEs that meet specific criteria. It mirrors the structure of the old SME scheme, granting an additional 86% deduction on top of the standard 100% deduction (totalling 186%), along with a 14.5% payable tax credit. However, qualifying for ERIS involves strict conditions.

To be eligible, a company must be loss-making before applying the R&D deduction and meet a 30% intensity threshold. This means qualifying R&D expenditure must account for at least 30% of the company's total relevant expenditure for accounting periods starting on or after 1 April 2024. Importantly, the intensity calculation must include costs from all connected companies globally - a detail that is often overlooked by SMEs.

One common error is miscalculating the intensity threshold by focusing solely on R&D costs rather than comparing them to total GAAP-recognised expenses. Another mistake is attempting to claim ERIS as a profit-making company, as this scheme is exclusively for loss-making businesses.

There is a grace period for companies that narrowly miss the 30% threshold. If a company met the intensity requirement in the previous 12-month accounting period and submitted a valid claim, it may still qualify for ERIS in the current period - even if it falls below 30%. However, many SMEs are unaware of this provision and default to the merged scheme, potentially losing out on relief. Overlooking this grace period is a common and costly mistake.

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How to Choose Between RDEC and ERIS Without Errors

Step-by-Step Process for Scheme Selection

Choosing the right scheme can seem tricky, but breaking it down step by step makes it manageable. First, confirm your accounting period. Both the merged RDEC-style scheme and ERIS apply only to accounting periods starting on or after 1 April 2024. If your accounting period began earlier, the previous SME or RDEC rules will still apply.

Next, check your SME status. You qualify as an SME if you have fewer than 500 employees and either an annual turnover not exceeding €100 million or a balance sheet total not exceeding €86 million. Then, assess your profitability and calculate your R&D intensity. ERIS is strictly for companies making a loss, so you’ll need to confirm a trading loss for tax purposes before applying any R&D deductions. If you’re profitable at this stage, the merged scheme is your only option. If you’re loss-making, move on to the intensity test: your relevant R&D expenditure must account for at least 30% of your total relevant expenditure, including costs from all connected companies worldwide, for accounting periods starting after 1 April 2024.

Finally, consider the grace period. If your intensity falls below 30% in the current period but met the threshold in the previous 12-month accounting period - and you submitted a valid claim for expenditure after 1 April 2023 - you might still qualify for ERIS.

Once you’ve identified the right scheme, it’s important to avoid common mistakes that could derail your claim.

Common Mistakes in Scheme Selection

One of the most frequent errors is applying for ERIS while being profit-making. Some SMEs assume that high R&D intensity alone qualifies them for ERIS, but the loss-making condition is non-negotiable. Even a small profit before applying the R&D deduction will disqualify you.

Another common mistake is forgetting to include connected companies when calculating the 30% intensity threshold. Overlooking this can lead to incorrect eligibility calculations and claims under the wrong scheme.

Using outdated thresholds is another pitfall. For periods after 1 April 2024, the threshold is 30%, not the previous 40%.

There’s also the so-called "break-even trap." As Lewis Songaila from GrantTree explains:

"If you exactly broke even, you would only be able to claim 12.5p per £1 of qualifying expenditure... less than you'd receive via the RDEC and merged schemes (16.2p)".

Companies with very small losses may find the merged scheme more beneficial, but many mistakenly assume ERIS is always the better option.

Finally, some SMEs overlook the grace period entirely. If your intensity narrowly misses the 30% threshold, you may still qualify for ERIS if you met the requirement in the previous period. Ignoring this could mean settling for a reduced benefit - around 16p per £1 instead of up to 27p per £1. Avoiding these missteps is key to maximising your tax relief.

RDEC vs ERIS: Side-by-Side Comparison

The table below highlights the key differences between the schemes, helping you make an informed choice:

Choosing the right scheme isn’t always straightforward. As Albert Cabral from RCK Partners points out:

"The ERIS scheme was designed specifically for loss-making SMEs and operated the same way that the SME scheme worked previously".

HMRC also clarifies:

"You can choose to claim under the merged scheme even if you are eligible for ERIS, but you cannot claim under both schemes for the same expenditure".

This means companies operating at marginal losses should carefully calculate the potential benefits of both schemes before deciding which one to pursue.

Common Errors When Preparing Claims

Errors Under RDEC Rules

One frequent mistake under the RDEC scheme is misclassifying Externally Provided Workers (EPWs) as subcontractors. Another common misstep involves including ineligible expenses like recruitment agency fees, company car benefits, or one-off capital software licences. These costs must be excluded. Additionally, RDEC credits need to be recorded as taxable trading income, a requirement sometimes overlooked.

Large companies - or SMEs treated as large - cannot claim for subcontracted activities under RDEC rules. However, they can claim for EPWs. Many SMEs also fail to recognise that RDEC credits must be declared as taxable trading income in both their statutory accounts and tax computations. Failing to do so can lead to compliance issues with HMRC.

As Copper Tax highlights:

"The consequences of mistakes in your R&D tax credit claim can vary depending on the type of mistake made, but it is better to avoid making errors from the outset than to try and fix them later".

Errors Under ERIS

ERIS claims, like RDEC, often suffer from calculation errors and the inclusion of ineligible costs. A common error is miscalculating the 30% intensity threshold by using outdated figures or failing to account for connected companies' expenditure. Another issue is including costs incurred before 1 April 2023, which disqualifies them from the ERIS enhanced rate.

Additionally, other income streams, such as property profits, can reduce the unrelieved loss and limit the payable tax credit. For instance, in an HMRC case from April 2024, Company B had £100,000 in qualifying R&D expenditure and £100,000 in property profits. Despite not using its loss to offset these profits, its credit was restricted to £5,220 - far less than the £19,720 credit received by a similar company without other income.

Compliance Issues Affecting Both Schemes

Both RDEC and ERIS claims share some common compliance challenges. One key requirement is submitting an Additional Information Form (AIF) alongside or before the Company Tax Return. As Lewis Songaila from GrantTree notes:

"If you don't submit the AIF, HMRC will reject your claim".

Another frequent pitfall is overreaching by including activities that don’t meet DSIT guidelines. Examples include preliminary market research, routine troubleshooting, or production trials, all of which are ineligible for claims.

Weak documentation is another red flag for HMRC. Issues like high-level percentage allocations without clear justification, missing invoices, or inadequate time-tracking systems can lead to problems. Copper Tax stresses:

"A 'just and reasonable' basis is not some kind of HMRC approved methodology - HMRC does not have an approved methodology or list of acceptable approaches, each claim is assessed on its own merits/fact patterns".

Internal Controls and Professional Support

Internal Controls to Reduce Errors

Strong internal controls can help prevent costly mistakes when dealing with HMRC. A good starting point is appointing a Designated Responsible Officer - a company officer who takes charge of ensuring your claim's accuracy. This person should regularly audit eligibility by reviewing both personnel and financial records to confirm the company’s SME status, including linked and partner enterprises.

For the ERIS scheme, it's important to conduct quarterly reviews. These reviews should compare qualifying R&D expenditure (from all connected companies) with total expenditure to ensure the 30% threshold is met. Additionally, take advantage of the grace period where applicable.

Documentation is another critical area. Keep detailed, contemporaneous technical records that outline the scientific or technological advances you’re pursuing and the uncertainties you're tackling. These records will directly support the information required for your Additional Information Form (AIF). When dealing with connected companies with differing accounting periods, use a consistent and reasonable cost allocation method - and stick to it year after year.

Don’t overlook deadlines. Incorporate the six-month notification deadline for first-time claimants or those inactive for three years into your year-end planning calendar. Additionally, review your supply chain contracts to establish which party controls and initiates the R&D work, as this determines who is legally entitled to claim under the contracted-out rules.

By implementing these measures, you’ll create a strong framework that not only ensures compliance but also makes it easier to work with external advisors.

How Zest R&D Tax Advisors Can Help

While internal controls are essential, expert external guidance can make all the difference. Zest R&D Tax Advisors specialises in helping SMEs navigate the complexities of both the RDEC and ERIS schemes. They’ll evaluate whether your company meets the intensity condition for ERIS, guide you in selecting the most advantageous scheme, and ensure all compliance requirements, including the AIF and pre-notification deadlines, are properly handled.

Their expertise can uncover qualifying costs that might otherwise be missed, helping to maximise your relief while minimising the risk of HMRC enquiries. This is particularly important as HMRC has tightened compliance measures, leading to a 21% drop in R&D claims in 2022–23.

Zest operates on a percentage-based fee structure tied to successful claims, ensuring their incentives align with yours. They work alongside your existing accountants and provide comprehensive support during HMRC compliance checks. Their involvement is disclosed on the AIF, showcasing financial transparency and reducing the likelihood of drawn-out enquiries.

Conclusion

Deciding between RDEC and ERIS is a strategic choice, with the merged RDEC scheme offering approximately 16p, and ERIS potentially delivering up to 27p, for every £1 invested in R&D.

However, non-compliant claims can lead to severe consequences, including the complete denial of relief, demands for repayment with interest, and penalties reaching up to 100% in cases of deliberate concealment. Mistakes such as misjudging the 30% intensity threshold, missing the six-month pre-notification deadline, or failing to submit the required Additional Information Form can result in claim rejections or prolonged HMRC investigations.

The key to avoiding these pitfalls lies in strong internal controls. Assigning a dedicated officer responsible for R&D claims, keeping detailed technical records in real time, and routinely reviewing ERIS eligibility are crucial steps to minimise risks. Combining robust internal processes with expert advice is the best way to navigate the intricate R&D tax system.

This is where Zest R&D Tax Advisors can make a real difference. Their expertise ensures you claim under the most beneficial scheme, identify all eligible costs, and meet every compliance requirement. With HMRC increasing enforcement efforts, including criminal investigations and even raids, having professional support isn’t just helpful - it’s essential. A well-prepared claim backed by expert advice not only protects your business but also ensures it can withstand HMRC’s scrutiny.

FAQs

What are the main differences between the merged RDEC scheme and the ERIS scheme?

The merged RDEC scheme will apply to all companies with accounting periods starting on or after 1 April 2024. However, there’s an exception for loss-making, R&D-focused SMEs, which can instead claim under the Enhanced R&D Intensive Support (ERIS) scheme. While both schemes share the same rules for eligible expenditure, the way the credit is calculated differs. ERIS offers a higher payable rate aimed at supporting qualifying SMEs, whereas the merged RDEC provides a standard rate for larger companies and SMEs with less focus on R&D.

Eligible businesses have the option to claim under the merged RDEC, even if they qualify for ERIS. However, you cannot use both schemes for the same project. ERIS is tailored to assist SMEs that are heavily invested in R&D but might face cash flow challenges. On the other hand, the merged RDEC scheme serves as a broader option, catering to a more diverse group of companies.

How can SMEs ensure they meet the 30% R&D intensity requirement for ERIS?

To qualify for the 30% R&D intensity threshold under the ERIS scheme, SMEs need to calculate their R&D intensity. This is done by dividing their eligible R&D costs - like staff wages, contractor fees, and expenses for prototype materials - by their total relevant expenditure for the accounting period. This calculation should also include costs from any connected companies.

If the percentage falls short of 30%, businesses might need to re-evaluate their spending or adjust how costs are allocated to meet the threshold. Proper planning and maintaining detailed records are crucial to stay compliant and make the most of the scheme.

What are the most common mistakes SMEs make when claiming R&D tax relief in the UK?

When small and medium-sized enterprises (SMEs) apply for R&D tax relief, several common mistakes can cause delays or even reduce the amount they can claim.

One of the main issues is applying under the wrong scheme. For example, some businesses mistakenly use the SME scheme when they should be claiming under RDEC (Research and Development Expenditure Credit) or ERIS (Enterprise Relief for Innovation and Science), or vice versa. This mix-up can result in incorrect calculations or the inclusion of costs that don’t qualify.

Another frequent problem is including costs or activities that aren’t eligible. Routine work or general overheads, for instance, don’t meet the criteria for R&D tax relief. Additionally, it’s vital to correctly allocate staffing costs - whether for employees or external workers involved in qualifying activities.

Lastly, administrative errors can derail claims. Missing filing deadlines or failing to provide adequate supporting evidence often leads to HMRC rejecting claims or subjecting them to closer scrutiny.

To steer clear of these issues, it’s essential to stick closely to HMRC’s guidelines. Expert support from firms like Zest R&D Tax Advisors can help UK businesses ensure their claims are accurate, compliant, and fully optimised.

Related Blog Posts

• How to Calculate R&D Tax Relief in 2025
• R&D Tax Claim Checklist: 10 Essential Steps
• SME vs Large Company R&D Claims Compared
• RDEC vs ERIS: Reporting Requirements Explained