What’s the difference between the new RDEC and ERIS schemes?

The new RDEC (Merged) Scheme is similar to the old RDEC Scheme with some changes. It offers a net taxable benefit of about 16%.

The Enhanced R&D Intensive Support (ERIS) Scheme is for loss-making SMEs that meet specific conditions. It provides an 86% enhancement to qualifying expenditure and allowing losses to be surrendered for a 14.5% credit. This results in a net credit of approximately 27%.

Which companies qualify for ERIS?

The ERIS Scheme combines elements of the old SME Scheme and the new Merged Scheme. It mirrors the SME Scheme’s method of applying the tax benefit but with some notable differences.

To qualify, a company must be loss-making before calculating any R&D additional deduction. As well as this, 30% or more of total relevant expenditure must be R&D related. The Finance Act 2024 provides definitions and further details for “Relevant R&D Expenditure” and “Total Relevant Expenditure.” The calculation can be complex, especially for groups with connected overseas parties.

There’s also a year’s grace period. A company that meets the R&D Intensity threshold for one year will still qualify for the ERIS scheme for the next accounting period even if its R&D intensity drops. The company still needs to meet the loss-making condition for the grace period to apply.

When NOT to use the ERIS scheme

To get the most benefit from the ERIS Scheme, a company’s losses must at least match its qualifying R&D expenditure, so they can surrender the maximum amount.

That means the ERIS Scheme may not be the best option for companies that only have a small loss.

For example, a company with a nominal £1 loss would only be able to surrender the 86% enhancement for a 14.5% credit, providing a tax benefit of around 12.5%. That’s less than the 16% available through the Merged Scheme, so companies with relatively small losses should always calculate which scheme yields the best result.

Changes to qualifying expenditure

In most other respects, the ERIS scheme follows the rules of the new RDEC scheme.

Unlike the old SME scheme, companies can claim for grant-funded and subsidized expenditure, which simplifies the process compared to the old SME rules.

Payments to subcontractors can also be included, as before, but the rules about which subcontractor payments are eligible have changed.

The claiming company must demonstrate that it ‘intended or contemplated’ to undertake the R&D for tax purposes, as opposed to this decision being taken by the subcontractor.

This implies that companies contracting out R&D must involve a competent professional to confirm that R&D is required before drafting any contracts.

Related: When can subcontracted activities be included in an R&D claim?

Overseas Expenditure Restrictions

Under both the ERIS and Merged Schemes, there are now restrictions on overseas expenditure.

These include subcontractors undertaking R&D activities overseas and externally provided workers that are not subject to PAYE and NIC. This is a significant shift from the old SME Scheme and will have a significant impact on UK companies that form part of multinational groups.

There are some exemptions to these restrictions.

Firstly, the rules don’t apply to companies with registered offices in Northern Ireland, where the restrictions are lifted but a cap on benefits claimed through the ERIS scheme applies.

Additionally, UK companies are exempt from these restrictions if they can prove that the necessary R&D conditions are present only overseas and replicating them in the UK would be unreasonable. These conditions include geographical, environmental, social, or legal factors but exclude reasons related to cost or workforce availability.

Where to learn more about the ERIS scheme?

Most of the rules of the ERIS scheme are the same as for the Merged (new RDEC) scheme – so the best place to start is with our free course on The Merged R&D scheme.

If you need more detail on the Northern Ireland provisions, we covered this in a webinar for our members.

The ERIS relief calculations are covered in our course Accountancy in R&D Tax Relief – the Basics.