Understanding ERIS Calculation and Eligibility: A Technical Guide for Accountants

For periods starting from 1 April 2024, the Enhanced R&D Intensive Support (ERIS) scheme provides a generous payable tax credit for loss-making SMEs with substantial R&D expenditure as an alternative to the meged RDEC scheme. Accurate application requires a precise understanding of both the eligibility threshold and the calculation mechanics under Chapter 2 of Part 13 of CTA 2009. This blog outlines the technical requirements and calculation methodology, including recent statutory and HMRC guidance.

While some element remain the same this blog cover the ERIS 30% intensity calculation, not the earlier intensity calculation which applies on claimed SME R&D Tax Credits from 1st April 2023 until new accounting periods start from 1st April 2024.

ERIS Eligibility Criteria

A company qualifies for ERIS if it satisfies all of the following conditions in the accounting period:

1. SME Status
   The company must meet the SME definition under CTA 2009, with reference to the guidance at CIRD91000.
2. R&D Intensity
   The company must meet the R&D intensity condition, as set out in CTA09/S1045ZA and clarified in CIRD123000. This is satisfied where:
   • Relevant R&D expenditure is 30% or more of the company’s total relevant expenditure for the period. Where the company is connected to other companies during the period, the test is applied to the aggregate expenditure across all connected companies.
   The intensity formula is: \text{R&D Intensity} = \frac{\text{Relevant R&D Expenditure}}{\text{Total Relevant Expenditure}} with adjustments to exclude intra-group charges (s.1045ZA(6)) and disallow amortisation addbacks under CTA09/S1308(5).
3. Loss-Making Position
   The company must be trading and loss-making before applying the R&D additional deduction. This is explicitly required by CTA09/S1044(5A) and CIRD122000.
4. Ineligible Company Restrictions
   The company must not be listed as ineligible under s.1142 (e.g. certain state-owned or tax-exempt entities). See CIRD163000 for details.
5. Qualifying Expenditure
   The R&D activity must result in Chapter 2 qualifying expenditure, which includes staffing, software, externally provided workers, consumables and relevant subcontractor costs. These are described in ss.1051 to 1053A and CIRD122200.

ERIS: The Calculation Process

Once eligibility is confirmed, the claim under ERIS involves two distinct steps: the additional deduction and the payable credit.

1. Additional Deduction (CTA09/S1044)

The qualifying Chapter 2 expenditure is enhanced by 86%, added to the tax computation as an additional deduction. This increases the company’s trading loss.

Example:

• Qualifying expenditure = £200,000
• Additional deduction = £200,000 × 86% = £172,000
• Enhanced Expenditure = £200,000 + £172,000 = £372,000

2. Payable Tax Credit (CTA09/S1054–1058)

A payable credit is available by surrendering all or part of the surrenderable loss, calculated as the lower of:

• The enhanced R&D expenditure (qualifying expenditure × 186%)
• The unrelieved trading loss (as defined in s.1056)

The credit is worth 14.5% of the surrendered amount, and is not taxable.

Example:

• Qualifying expenditure = £200,000
• Enhanced expenditure = £200,000 × 186% = £372,000
• Pre R&D loss = £78,000
• Enhanced loss £78,000 + £172,000 (86% addiional R&D deduction) = £250,000
• Surrenderable loss = lower of £372,000 and £250,000 = £250,000
• Payable credit = £250,000 × 14.5% = £36,250

Key Adjustments and Considerations

• Unrelieved Loss must be computed by deducting any current-period sideways relief, group relief, or other reliefs. Losses brought forward or carried back are ignored.
• Pre-trading companies may elect under s.1045 for a deemed loss equal to 186% of qualifying expenditure (see CIRD122300). No additional deduction is available in this case.
• Out-of-period expenditure is claimable if the tax deduction arises in the current period (This is the area of intangible assets and amortisation). However, the enhancement rate depends on when the cost was incurred (CIRD126000).
• PAYE/NIC cap £20,000 plus 3 times company NIC+PAYE applies unless an exemption applies. See CIRD140000.

Summary

ERIS offers valuable support for R&D-intensive SMEs, but its application is conditional, structured, and highly dependent on a compliant and technically accurate calculation. Accountants must ensure:

• The 30% R&D intensity condition is correctly calculated. The Additional infotrmation form requires the detail if ERIS is being claimed.
• Relief is only claimed on qualifying Chapter 2 expenditure.
• The surrenderable loss is determined correctly.
• Credit is claimed at 14.5%, even for historic costs, but enhanced appropriately based on the date of expenditure.

If you are preparing or reviewing an ERIS claim and want expert guidance on statutory compliance and maximising your entitlement, contact us here: RandDTax Contact Page

Christopher Toms MA MAAT
Compliance Director
RandDTax