The enhanced R&D intensive support (ERIS) schemes provide enhanced R&D tax relief to loss-making, small and medium sized enterprises (SMEs) whose ‘R&D intensity ratio’ meets or exceeds the ‘R&D intensity threshold’. The intensive scheme is available for expenditure incurred on or after 1 April 2023.
An SME, for R&D tax purposes, is a company with 500 or fewer employees and either turnover not exceeding € million or gross assets not exceeding €86 million. The consolidated worldwide group is considered in determining the size, as well as considering any linked or partner enterprises which are the subject of more detailed rules.
R&D intensive
An SME is considered ‘R&D intensive’ if:
- For accounting periods beginning on or after 1 April 2023, the company meets an R&D intensity threshold of 40%, or
- For accounting periods beginning on or after 1 April 2024, the company is loss-making prior to claiming R&D tax relief and the company meets an R&D intensity threshold of 30%.
The R&D intensity ratio of a company is calculated as its qualifying R&D expenditure divided by its ‘total relevant expenditure’. This being, expenditure brought into account in calculating the profits for the period, plus R&D expenditure capitalised as an intangible fixed asset, plus any pre-trade R&D expenditure, less any R&D-related amortisation disallowable.
Further complexity arises where a company isn’t standalone as the figures for connected companies also need to be disclosed and brought into the calculation. The R&D expenditure of connected companies includes expenditure on which R&D relief could be claimed, regardless of whether a claim is actually made or not. The total relevant expenditure calculations also need to additionally deduct any expenditure which consists of a payment, or other transfer of value, to a connected company.
We are able to assist with calculating the above where it’s not clear which regime a company falls under.
If a company doesn’t meet the criteria to be SME intensive, relief is still available under the SME regime for accounting periods beginning before 1 April 2024, or the merged regime, for accounting periods beginning on or after 1 April 2024. Please see our other factsheets linked here for detail on these schemes.
Additional provisions – accounting periods beginning on or after 1 April 2023
Where an SME’s qualifying R&D expenditure has been subsidised (eg by a grant, a subsidy, or customer contributions), SME R&D intensive relief will not be available, although relief may instead be available under the Research and Development Expenditure Credit (RDEC) scheme for the funded element of the expenditure.
Relief is not available under the SME scheme if a company is undertaking R&D sub-contracted to it by another party. In some circumstances, relief may still be available under the RDEC scheme, depending on the party contracting out R&D to the claimant.
Additional provisions – accounting periods beginning on or after 1 April 2024
Intensive SME relief is available for subsidised expenditure with no additional complexity.
Where a company is undertaking R&D sub-contracted to it by another party, relief is denied under both the intensive and merged scheme, although consideration should be given as to whether the company has initiated R&D of its own volition in order to fulfil the commercial contract, as relief ought to go to the party making the decision to undertake R&D, to incentivise it to undertake more.
For accounting periods beginning on or after 1 April 2024, a one-year grace period allows a company who fails to meet the intensity threshold to continue to claim the intensive relief provided that they qualified for and made a claim for intensive relief in the previous year.
For accounting periods beginning on or after 1 April 2024, the intensive conditions vary for companies registered in Northern Ireland.
Eligible expenditure for SME R&D intensive scheme and ERIS scheme
The main costs which are eligible for R&D relief are:
- The costs of employing staff who are directly engaged in carrying out the R&D itself, as well as indirect costs related to some necessary supporting and ancillary activities (eg administration or maintenance activities insofar as undertaken for R&D).
- Sub-contracted activities. Payments made to sub-contractors undertaking R&D activities contracted to them, or undertaking routine activities essential to the principal company’s R&D can be claimed, subject to a restriction to 65%. Different rules apply where the claimant and sub-contractor are connected. For accounting periods beginning on or after 1 April 2024, claimable contracted out activities are limited to those undertaken in the UK. Overseas costs are only claimable in very limited circumstances.
- Externally provided workers. Payments made for workers provided to the claimant by a staff provider (eg agency or personal services company) can be claimed so far as those workers are engaged in undertaking R&D activities under the supervision, direction, and control of the claimant. Qualifying expenditure is restricted to 65%, although different rules apply where the claimant and staff provider are connected. For accounting periods beginning on or after 1 April 2024, claimable expenditure is limited to payments for workers whose earnings are subject to PAYE/NIC. Overseas costs are only claimable in very limited circumstances.
- Consumable items. Expenditure incurred on, for example, materials, or light, heat, power and water may be claimed, provided that they are consumed or transformed in the R&D process. Expenditure incurred on consumable items which form part of goods later sold or transferred as part of the company’s ordinary business cannot be included.
- Computer software. Payments for licences are claimable so far as the software is used in the R&D activities. This does not expenditure on hardware, domains, certificates, or internet fees.
- For accounting periods beginning on or after 1 April 2023, costs of data licences and of cloud computing services (including remote data storage) are eligible so far as employed in the R&D (and subject to some cost-recouperation exclusions).
- Payments to participants of a clinical trial, provided the trial is undertaken in connection with the development of a health care treatment or procedure.Â
SME intensive scheme – the tax benefit
For a non-R&D intensive SME, from 1 April 2023, the payable tax credit is up to £18,600 based on £100,000 of qualifying R&D expenditure. The company claims an additional deduction of 86% and, provided it has trading losses equal to, or in excess of, 186% of the qualifying R&D expenditure (ie £186,000), it can surrender losses of up to £186,000 at a rate of 10%. For an intensive SME, the surrender of losses occurs at 14.5%, providing a tax benefit of £26,970.
For accounting periods beginning on or after 1 April 2024, the mechanism and tax benefit is the same, but with the added proviso that the company must have taxable losses prior to the 86% enhanced deduction being taken.
All payable SME tax credits are subject to a cap of £20,000 + 300% of the claimant’s total PAYE/NIC liabilities.
How Saffery can help
Having undertaken claims for companies of all sizes from all sectors (including but not limited to manufacturing, IT, pharmaceutical, construction, food, and beverage and agricultural), Saffery ensures that claims are both maximised and robust.
Our approach is flexible and tailored to your company’s requirements to ensure that the process is cost and time efficient. Our involvement can vary from initial workshops and feasibility work, to reviewing a claim prepared by your company, to preparing the supporting claim documentation alongside you. Our work can help you to identify whether any of your company’s activities might constitute R&D for tax purposes, which scheme is appropriate to claim under, and the quantum of the claim.
Alternatively, if you have already submitted R&D tax credit claims but HMRC has opened an enquiry into your claim, we can work with you to bring this to a conclusion.
If you have any questions on the matters discussed, please get in touch with either Rachel Chappell or Ollie Bull.
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