RDEC vs ERIS: Pharma Sector Case Studies

The UK's pharmaceutical sector relies heavily on R&D tax relief to offset the high costs of drug development. As of April 2024, two primary schemes - RDEC and ERIS - help businesses recover R&D expenses. Here's the key difference:

• RDEC: Open to all UK companies, offering a taxable credit of around 15-17% net benefit. Ideal for large firms or profit-making SMEs.
• ERIS: Tailored for loss-making SMEs spending at least 30% of total costs on R&D. Provides up to 27p per £1 spent, offering a higher benefit than RDEC.

Choosing between these schemes depends on your company's financial position and R&D intensity. For loss-making biotech SMEs, ERIS often delivers greater benefits, while RDEC suits larger or profit-making companies. Both schemes share rules for eligible costs but differ in their treatment of subcontracted work and overseas expenses.

Quick Comparison:

Understanding these schemes and their compliance requirements, such as the PAYE cap and restrictions on overseas costs, ensures your business maximises its claim potential.

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RDEC and ERIS: How the Schemes Differ

Although both RDEC and ERIS follow the same rules for qualifying expenditure, they serve different purposes and audiences. RDEC is open to all UK companies involved in R&D and provides a taxable credit, while ERIS is tailored for loss-making SMEs that dedicate at least 30% of their spending to R&D activities.

For companies eligible for ERIS, there is the option to claim under the unified RDEC scheme instead. However, it’s important to note that businesses cannot claim under both schemes for the same expenditure. Both schemes also share a restriction: a PAYE cap. This cap is set at £20,000 plus 300% of the company’s relevant PAYE and National Insurance contributions, although certain exemptions may apply.

RDEC Scheme for Pharmaceutical Companies

Under the merged RDEC scheme, companies can claim a 20% taxable credit on qualifying R&D expenses. This credit is treated as trading income and, therefore, subject to Corporation Tax. One of RDEC’s key advantages is that it doesn’t require a specific proportion of spending on R&D, making it accessible to a wide range of businesses. As a result, it’s often the go-to option for large corporations and profit-making SMEs. If a company cannot use the credit in the current period, the remaining amount can be carried forward to reduce future tax liabilities.

ERIS Scheme for R&D-Intensive Businesses

ERIS offers an enhanced deduction system for loss-making SMEs. These companies can claim an additional 86% deduction on top of the standard 100%, amounting to a total deduction of 186% on qualifying R&D costs. They can then convert this enhanced loss into a payable tax credit worth up to 14.5% of the surrenderable loss. Crucially, this credit is not subject to tax.

ERIS is specifically designed for SMEs that meet the 30% intensity condition, meaning their R&D expenditure must account for at least 30% of their total spending during the accounting period. This requirement also applies to connected companies, so businesses with parent or subsidiary relationships must calculate their intensity ratio carefully. Interestingly, if a company met the 30% threshold in its previous 12-month accounting period and made a valid claim, it can still qualify for ERIS in the current period, even if its R&D intensity slightly dips below the threshold.

These distinctions provide a clearer understanding of how the schemes operate and pave the way for exploring practical applications in industries like pharmaceuticals.

Case Studies: Pharma Sector Applications

Case Study 1: Large Pharma Company Using RDEC

A major pharmaceutical company improved its RDEC claim by implementing a cascading interview process across departments. This method helped uncover qualifying R&D activities while allowing technical consultants to engage directly with development teams without disrupting daily operations.

By closely analysing expenditure, particularly around contract staff and EPWs, the company identified additional eligible costs. Advisers also developed position papers on various contractual relationships to ensure compliance with RDEC criteria. As MMP Tax highlighted:

"The review and recommendations of this work resulted in a substantial increase in eligible costs".

To further streamline the process, the company conducted training workshops aimed at better identifying R&D projects. Notably, the RDEC credit was allocated directly to departmental budgets instead of being held centrally. According to MMP Tax:

"The RDEC is now allocated to the Department budgets each year. This direct financial benefit has resulted in widespread support for our work".

This strategy not only encouraged broader team participation in the tax relief process but also improved the board’s understanding of the innovative work happening within the organisation.

In comparison, another case involving an SME biotech firm demonstrates how ERIS can deliver even greater benefits, especially for companies facing early-stage challenges.

Case Study 2: SME Biotech Firm Using ERIS

A biotech SME, operating at a loss, leveraged ERIS for its early-stage drug discovery efforts. The company met the 50% R&D intensity threshold required for the scheme and reported £500,000 in qualifying R&D costs. This allowed the firm to claim enhanced expenditure of £930,000, representing 186% of its actual spend.

From this, the company secured a £134,850 payable tax credit, calculated at 14.5% of the surrenderable loss. This injection of cash flow was critical for the pre-revenue business. The effective benefit - approximately 27% of its R&D spend - was significantly higher than the 15% to 16.2% range under the merged scheme. ForrestBrown noted:

"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".

The SME also maintained thorough documentation linking specific costs to the resolution of scientific uncertainties. This approach aligned with HMRC's increasing focus on technical justification and compliance.

These examples highlight how tailoring R&D claims to a company’s size and financial situation can maximise the benefits available to businesses in the pharmaceutical sector.

Choosing Between RDEC and ERIS

Under the merged regime, the decision between RDEC and ERIS has become more flexible. Previously, factors like grant funding or subcontracting arrangements determined which scheme applied. Now, if your pharmaceutical company qualifies for ERIS, you have complete control over how to allocate expenditure - whether through RDEC, ERIS, or a combination of both.

The key eligibility criterion is meeting the 30% R&D intensity threshold. For biotech and pharmaceutical SMEs, this is often manageable due to their significant R&D spending compared to other costs. However, meeting this threshold doesn’t automatically make ERIS the best option. As Jen Badger from WhisperClaims puts it:

"If a company meets the ERIS or NI ERIS criteria, you decide the allocation of qualifying R&D spend."

Your financial position plays a critical role in determining which scheme offers the most benefit. While ERIS provides greater support for R&D-heavy firms, it’s not always the optimal choice. Companies with smaller losses and lower qualifying R&D expenditure often find RDEC more advantageous. The tipping point occurs when trading losses drop below 25.7% of qualifying R&D spend - at that stage, RDEC generally provides a better return.

Some companies use ERIS strategically to secure a buffer for future years when they might fall below the intensity threshold. For example, biotech firms experiencing fluctuating R&D intensity due to grant cycles or clinical trial phases can use this strategy to maintain eligibility during leaner periods. This approach requires meticulous scenario testing, as outlined below.

RDEC vs ERIS: Benefits for Pharma Companies

The table below highlights the main features of each scheme, helping pharmaceutical companies decide which one aligns with their circumstances:

Scenario testing is crucial. Companies should model both options, factoring in their specific loss position and profitability, to identify which scheme delivers the best tax benefit. If splitting costs between schemes, ensure your Additional Information Form (AIF) accurately details the expenditure breakdown across categories for compliance.

These comparisons lay the groundwork for understanding how grant funding and timing influence scheme eligibility.

How Grant Funding Affects Scheme Eligibility

Grant funding, once a decisive factor in scheme selection, no longer forces companies into RDEC. The 2026 regulatory changes address subsidised R&D within ERIS, eliminating earlier restrictions tied to grant funding.

Now, eligibility depends solely on meeting the ERIS intensity threshold - not the funding source. If your company hits the 30% requirement and operates at a loss, ERIS is an option regardless of grant involvement. WhisperClaims highlights this flexibility:

"There's nothing about the claim or the project that dictates how much spend can be claimed through each scheme... the choice of how to route the costs is entirely down to the claimant."

This change is especially beneficial for biotech startups and SMEs in the pharmaceutical sector, which often rely on external funding. Carefully calculate your R&D intensity by dividing total qualifying R&D expenditure by total expenditure to confirm eligibility. Additionally, the one-year grace period offers reassurance for companies hovering near the 30% threshold due to clinical trial phases or shifting grant cycles.

For firms in Northern Ireland, NI ERIS operates similarly to the standard ERIS scheme, providing the same flexibility for grant-funded projects.

Qualifying R&D Costs in the Pharma Sector

Eligible Costs Under RDEC and ERIS

Both the RDEC and ERIS schemes cover a range of qualifying costs, though there are differences in how subcontracted work is treated. For instance, full staff costs and expenses related to clinical trial volunteers, including recruitment, are eligible under both schemes. These allowances form the backbone of the financial benefits these schemes provide.

Subcontracted R&D is where the rules diverge. Under ERIS, companies can claim 65% of payments made to subcontractors who are not connected to them. However, RDEC only allows claims for subcontracted work carried out by individuals, partnerships, or qualifying organisations like universities, NHS trusts, or charities.

For externally provided workers (EPWs) - agency-supplied staff working under your supervision - 65% of their cost is claimable, provided they are on a UK payroll and subject to PAYE and National Insurance contributions. Consumables such as lab supplies, chemicals, and utilities are also eligible. Additionally, since April 2023, costs for software, cloud services, data licences, and even pure mathematics research can be claimed. These detailed criteria set the stage for understanding how overseas expenditure is handled under these schemes.

Changes to Overseas Expenditure Rules

While direct costs are clearly defined, new restrictions on overseas expenditure are set to take effect for accounting periods beginning on or after 1st April 2024. Payments to overseas subcontractors and EPWs will generally not be allowed unless specific exemption criteria are met. For EPWs, only those subject to UK PAYE will qualify. For subcontractors, their services must be physically carried out within the UK to be eligible.

Overseas costs can only be claimed if unique geographical, environmental, social, or regulatory factors make conducting the work in the UK entirely impractical. For example, a pharmaceutical company running clinical trials abroad to access a patient demographic unavailable in the UK could qualify, provided they document why conducting the trials domestically would be wholly unreasonable. However, cost savings or a lack of available workers in the UK are not valid reasons for claiming overseas costs. As WhisperClaims clarifies:

"A company cannot carry out R&D overseas solely because it is cheaper to do so, or use overseas workers because they are struggling to hire in the UK, and include those costs in their R&D claim."

These tighter restrictions on overseas expenditure require companies to carefully document their claims. For exemptions, detailed justifications must be included in the Additional Information Form (AIF), along with PAYE references for EPWs and a thorough explanation of why the overseas work was unavoidable.

Conclusion

The decision between RDEC and ERIS should reflect your company’s specific situation. Factors like financial health, company size, and the level of R&D activity all play a role. For instance, large pharmaceutical companies often see advantages with the RDEC scheme, whereas SMEs operating at a loss and meeting the 30% R&D intensity threshold are better positioned to benefit from ERIS. This is supported by case studies that highlight how choosing the right scheme has been crucial for driving innovation in the pharmaceutical sector.

The regulatory updates introduced in 2026 have broadened access to these schemes but also increased compliance requirements. These changes include a reduced 30% R&D intensity threshold with a one-year grace period and stricter rules around overseas expenses. Companies can no longer justify claiming costs for overseas subcontractors purely on financial grounds; they must prove that carrying out the work abroad was entirely unavoidable due to unique circumstances.

Navigating these complexities often requires expert guidance. Zest R&D Tax Advisors provides tailored support for UK pharmaceutical companies, helping them navigate everything from calculating R&D intensity to completing the AIF. Their expertise ensures businesses capture all eligible costs - such as clinical trial expenses, consumables, software, and cloud services - while staying compliant with HMRC’s pre-notification rules and overseas expenditure restrictions.

Whether you’re looking to maximise a RDEC claim or take full advantage of the higher ERIS rate, professional advice can make all the difference. Zest even offers a free consultation to evaluate your eligibility and help boost the value of your claim.

FAQs

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

To work out R&D intensity for ERIS, take your qualifying R&D costs - this includes things like wages, subcontractor fees, and materials. Divide that figure by your total expenditure for the accounting period, then multiply by 100. If the outcome is 30% or more, your company qualifies.

Make sure to keep thorough records of both your R&D costs and overall expenses to back up your calculation and any related claims.

When does RDEC beat ERIS for a loss-making SME?

RDEC can often be a better choice for loss-making SMEs with modest trading losses. While ERIS provides a higher relief rate of up to 27%, the benefit is restricted by the surrenderable loss calculation, which hinges on the enhanced trading loss. On the other hand, RDEC offers a 20% taxable credit on all qualifying R&D expenditure, making it more advantageous when ERIS's cap limits the total relief available.

What overseas R&D costs can still qualify from 1 April 2024?

Overseas R&D costs can still qualify for relief if there are specific reasons why the activity cannot reasonably be carried out in the UK. This might include situations where the work requires unique geographical, environmental, or social conditions that are only available abroad.

Starting from 1 April 2024, HMRC will introduce exceptions under certain conditions, outlining when such overseas activities may still be eligible.

Related Blog Posts

• SME vs Large Company R&D Claims Compared
• RDEC vs ERIS: Prototyping Eligibility Explained
• Merged RDEC and ERIS Rules Explained
• ERIS Regulation Changes 2026