As the UK’s R&D tax relief landscape continues to evolve, businesses, particularly loss-making SMEs, face new decisions about how best to claim support for their innovation efforts. At BHP, we are helping clients navigate these changes, especially when choosing between the new Merged Scheme and the Enhanced R&D Intensive Support (ERIS) scheme.
What’s Changed?
For accounting period starting on or after 1 April 2024, the UK government replaced the previous SME and RDEC schemes with a Merged Scheme and introduced ERIS to provide additional support for R&D-intensive, loss-making SMEs.
Under the Merged Scheme, loss-making companies receive a 20% taxable expenditure credit, with notional tax deducted at 19%, resulting in an effective benefit of 16.2%.
In contrast, ERIS allows qualifying SMEs to:
- Deduct an additional 86% of qualifying R&D costs (on top of the standard 100%), giving a total deduction of 186%
- Claim a payable tax credit of up to 14.5% of the surrenderable loss, which is not taxable
This can result in an effective benefit of up to 26.97%, but the actual return depends on how much of the enhanced loss can be surrendered. In a recent case we reviewed, only 55% of the enhanced losses could be cashed in due to the overall accounting results, reducing the benefit to 14.83%, making the Merged Scheme more favourable.
Understanding ERIS Eligibility
To qualify for ERIS, a company must:
- Be a loss-making SME
- Have R&D expenditure of at least 30% of its total business expenditure for the accounting period
There is also a grace period: if a company met the 30% threshold in the previous year and made a valid claim, it can still qualify even if it falls below the threshold in the current year.
The intensity ratio is calculated by dividing qualifying R&D expenditure (including that of connected companies) by total relevant expenditure. This includes trading costs, pre-trading expenditure, and certain tax computation deductions, but excludes amortisation and payments to connected companies.
Strategic Considerations
Choosing between ERIS and the Merged Scheme is not always straightforward. While ERIS offers a higher potential benefit, it’s conditional on the ability to surrender enhanced losses. We have calculated that the break-even point is around 60%; if a company can surrender less than this, the Merged Scheme may be more beneficial.
Importantly, you can choose to claim under the Merged Scheme even if you’re eligible for ERIS, but you cannot claim under both schemes for the same expenditure.
What Should You Do?
If you’re considering undertaking R&D or planning to claim R&D tax credits, it’s crucial to assess your eligibility and model your potential returns early, especially for Corporation Tax estimates and cash flow planning.
Get in touch with one of BHP’s R&D tax specialists today to discuss your options and ensure you’re making the most of the relief available. We will help you navigate the rules, optimise your claim, and support your innovation journey.
