RDEC vs ERIS: Prototyping Eligibility Explained

Q: What’s the difference between RDEC and ERIS when it comes to prototyping costs?

The main distinction between RDEC (Research and Development Expenditure Credit) and ERIS (Enhanced R&D Intensive Support) lies in their eligibility requirements, relief rates, and how the credits are applied in financial accounts. RDEC is accessible to most companies engaged in qualifying R&D activities, including those operating at a loss. It offers a relief rate of 18.6%, with the credit displayed above the line in financial statements. While this makes the credit taxable, it also enhances profit-before-tax. This scheme is a good fit for a variety of businesses, regardless of their size or whether they are profitable. ERIS, by contrast, is specifically designed for R&D-focused SMEs that allocate at least 30% of their total expenditure to R&D. It provides a higher relief rate of 26.97%, with credits recorded below the line. This means they are non-taxable and directly lower the company’s tax bill. This scheme works particularly well for loss-making SMEs that are deeply involved in activities like prototyping and development.

by Adam Park | January 31, 2026

RDEC and ERIS are two UK R&D tax relief schemes introduced in April 2024. They target different types of companies and offer varying benefits for R&D activities like prototyping. Here’s a quick breakdown:

RDEC: Designed for large companies and SMEs that don’t meet R&D intensity thresholds. Offers a 20% taxable credit, with an effective benefit of 16.2%. No minimum R&D expenditure requirement.
ERIS: Tailored for loss-making SMEs investing at least 30% of their expenditure in R&D. Provides approximately 27p for every £1 spent, offering higher relief than RDEC.

Both schemes cover prototyping costs such as staff wages, materials, and software. However, ERIS offers more financial support for qualifying SMEs, especially those in early stages or pre-revenue. Companies must choose one scheme per expenditure.

Key Differences:

RDEC suits larger or profit-making companies.
ERIS is for smaller, loss-making businesses meeting the 30% R&D intensity rule.

Choosing the right scheme depends on your company's size, profitability, and R&D spending.

RDEC vs ERIS UK R&D Tax Relief Schemes Comparison 2024

Eligibility Criteria for Prototyping Activities

RDEC Eligibility Requirements

Starting from 1 April 2024, large companies and profit-making SMEs that fall below the R&D intensity threshold can claim relief through the RDEC scheme. This scheme does not impose an R&D intensity requirement, meaning both profitable and loss-making companies can seek relief for eligible prototyping activities. Large companies - defined as those with 500 or more employees and either a turnover exceeding £100 million or gross assets over £86 million - automatically qualify for RDEC. Similarly, profit-making SMEs or those spending less than 30% of their total expenditure on R&D also fall under this scheme.

From April 2024, even companies that have received grants or subsidies can claim prototyping relief. However, prototyping activities generally need to take place within the UK, unless specific legal or geographical factors necessitate work abroad. Importantly, prototypes must be developed to address scientific or technological uncertainties and not as production models intended for commercial sale.

On the other hand, the ERIS scheme is tailored for SMEs with high R&D spending compared to their overall expenditure.

ERIS Eligibility Requirements

ERIS is specifically designed for loss-making SMEs that dedicate at least 30% of their total expenditure to qualifying R&D activities. To qualify, a company must meet the SME criteria: fewer than 500 employees and either a turnover below £100 million or a balance sheet total under £86 million. The R&D intensity threshold for this scheme, previously set at 40%, will be reduced to 30% for accounting periods beginning on or after 1 April 2024.

Lewis Songaila, an R&D Tax Expert at GrantTree, explains:

"To qualify, your company must be investing at least 30% of your total annual spending on qualifying R&D-related expenditures, such as wages, contractor fees, and raw materials for prototypes."

When calculating the 30% threshold, companies must factor in the R&D and total expenditure of all connected companies, including those based overseas. Additionally, if an SME met the intensity threshold during the previous 12-month accounting period and made a valid claim, it benefits from a one-year grace period. This allows the company to continue claiming under ERIS even if its R&D intensity drops below 30% in the current year. However, the company must be loss-making before applying the R&D enhancement.

These criteria clarify how prototyping costs align with each scheme, determining whether such activities can qualify for valuable tax relief.

Qualifying Prototyping Costs Under RDEC and ERIS

Prototyping Costs Covered by RDEC

Under the Research and Development Expenditure Credit (RDEC) scheme, businesses can claim key prototyping expenses, such as staff costs, consumables, and software-related expenses. Eligible staff costs include gross salaries, overtime, cash bonuses, Class 1 National Insurance contributions, and employer pension contributions for employees directly involved in prototyping. If employees split their time between R&D and non-R&D tasks, costs must be apportioned accordingly.

Consumables like water, fuel, power, and raw materials used in prototyping also qualify. As of 1 April 2023, software costs eligible for relief include traditional licences, cloud computing services, and data licences directly linked to R&D activities.

Payments to subcontractors are generally eligible if the subcontractor is an individual, a partnership of individuals, or a qualifying body (e.g., a university or charity). However, for accounting periods starting on or after 1 April 2024, costs related to overseas subcontractors and externally provided workers are typically excluded, except in specific cases.

It's important to note that commercial prototypes intended for sale cannot be included in claims. Once the technological uncertainty is resolved, further costs - like those for aesthetic adjustments or marketing - are no longer eligible. ERIS, however, offers similar coverage but with enhanced benefits for qualifying SMEs.

Prototyping Costs Covered by ERIS

The Enhanced R&D Relief for SMEs (ERIS) covers the same core prototyping costs as RDEC but offers greater financial advantages. Eligible SMEs can claim an additional deduction of 86% on qualifying expenses, along with a payable tax credit of 14.5%. This equates to a cash benefit of approximately 27p for every £1 spent on qualifying R&D work .

A unique feature of ERIS is its allowance for pre-trading expenditure. Start-ups, for instance, can claim this as a trading loss at 186% of the qualifying expenditure - an especially helpful provision for businesses developing prototypes before generating revenue.

However, ERIS has its exclusions. Costs for materials used in prototypes that are later sold are not eligible. Similarly, general overheads like rent, rates, capital expenditure on land or buildings, and intellectual property costs tied to patents cannot be claimed. Payments to unconnected contractors are limited to 65% of the actual payment, with comparable restrictions applying to overseas contractor costs.

Comparison of Relief Rates and Key Features

Relief Rate Comparison Table

When it comes to relief rates and key features, there are some clear differences between the RDEC (Merged Scheme) and ERIS. These distinctions are especially important for SMEs, particularly those that are loss-making.

For loss-making SMEs, ERIS offers around 27% relief for every £1 spent on qualifying R&D activities. In contrast, the merged RDEC scheme provides a net relief of approximately 16.2%. This means ERIS offers 67% more relief than RDEC for such companies.

A key differentiator between the two schemes is the R&D intensity requirement. Under ERIS, R&D expenditure must make up at least 30% of total expenditure for accounting periods starting on or after 1 April 2024. This is a reduction from the previous 40% threshold. The merged RDEC scheme, however, does not impose any such condition. Both schemes, however, have identical PAYE and National Insurance contribution caps, as shown in the table below.

Feature	RDEC (Merged Scheme)	ERIS
Headline Relief Rate	20% (taxable credit)	14.5% credit on 186% of costs (≈27% net)
Net Relief for Loss-Makers	16.2%	26.97%
Company Size	All sizes	SMEs only
Profitability Requirement	Profit or loss accepted	Loss-making only
R&D Intensity Threshold	None	30% of total expenditure
PAYE/NIC Cap	£20,000 + 300% of PAYE/NIC	£20,000 + 300% of PAYE/NIC
Grace Period	Not applicable	One year if prior intensity met

For SMEs based in Northern Ireland, there’s an additional consideration. These companies face a state aid limit of €300,000 over three years when claiming ERIS. Any relief exceeding this limit must then be claimed under the merged RDEC scheme.

Choosing the Right Scheme for Your Business

Factors to Consider When Choosing

Deciding between the RDEC and ERIS schemes depends on factors like your company’s size, profitability, and how much you invest in R&D. If you’re a loss-making SME with fewer than 500 employees and meet the R&D intensity criteria, ERIS might be the better option. Otherwise, the merged RDEC scheme is the way to go.

To qualify for ERIS, your R&D spending must hit the 30% threshold. Keeping an eye on this ratio is crucial to maintaining eligibility. However, there’s some flexibility: a one-year grace period allows you to remain eligible if you met the threshold in the previous accounting period and submitted a valid claim, even if your ratio dips below 30% in the current period.

Both schemes have a cap on payable credits - £20,000 plus 300% of PAYE and NIC liabilities. If your RDEC credits exceed this cap, the excess can be carried forward. These details highlight the importance of a tailored approach when deciding which scheme suits your business.

How Zest R&D Tax Advisors Can Help

Choosing between RDEC and ERIS for your prototyping efforts can be tricky, especially with all the rules and calculations involved. That’s where Zest R&D Tax Advisors comes in. They specialise in helping UK businesses maximise R&D tax relief by guiding you through scheme selection, claim preparation, and ensuring compliance with HMRC requirements.

Their team can help calculate your R&D intensity ratio, evaluate the impact of connected companies, and model the financial outcomes of each scheme. With their expertise, you can confidently choose the option that delivers the best results for your prototyping projects.

FAQs

What’s the difference between RDEC and ERIS when it comes to prototyping costs?

The main distinction between RDEC (Research and Development Expenditure Credit) and ERIS (Enhanced R&D Intensive Support) lies in their eligibility requirements, relief rates, and how the credits are applied in financial accounts.

RDEC is accessible to most companies engaged in qualifying R&D activities, including those operating at a loss. It offers a relief rate of 18.6%, with the credit displayed above the line in financial statements. While this makes the credit taxable, it also enhances profit-before-tax. This scheme is a good fit for a variety of businesses, regardless of their size or whether they are profitable.

ERIS, by contrast, is specifically designed for R&D-focused SMEs that allocate at least 30% of their total expenditure to R&D. It provides a higher relief rate of 26.97%, with credits recorded below the line. This means they are non-taxable and directly lower the company’s tax bill. This scheme works particularly well for loss-making SMEs that are deeply involved in activities like prototyping and development.

If you're unsure which scheme suits your business best, seeking advice from experts like Zest R&D Tax Advisors can help you make the right decision and maximise your tax relief.

What is the R&D intensity threshold for ERIS, and how does it affect eligibility?

To qualify for the ERIS scheme, small and medium-sized enterprises (SMEs) need to meet an R&D intensity threshold. This means at least 30% of their total annual expenditure must go towards eligible R&D activities. The threshold ensures the scheme supports businesses that prioritise research and innovation.

By meeting this requirement, businesses can access increased support for their R&D projects. It’s crucial for companies to evaluate their spending carefully to ensure they align with the criteria.

Are prototyping costs incurred outside the UK eligible for R&D tax relief?

No, the costs of prototyping activities conducted outside the UK are not eligible for the current R&D tax relief schemes. Both RDEC and ERIS specify that qualifying R&D activities must occur within the UK to meet the required criteria.

This rule is in place to ensure that the tax relief directly supports innovation and contributes to economic growth within the United Kingdom. Businesses should thoroughly evaluate the location of their R&D activities to ensure they align with these regulations.