At a glance
Loss making SMEs spending 30% or more of their total expenditure on R&D may qualify for the ERIS regime that offers a (more generous) 27% net cash benefit of the qualifying R&D expenditure.
Who is this relevant to? From when?
ERIS applies to SME companies for accounting periods beginning on or after 1 April 2024.
To benefit, a company must:
- be loss making for tax purposes, before taking the addition R&D deduction.
- qualify as an SME for the relevant accounting period (less than 500 employees and either turnover of less than €100m or Balance Sheet assets of less than €86m).
- spend 30% or more of its total expenditure on qualifying R&D activities.
There is a ‘grace’ year that allows an SME to continue to claim where the intensity conditions were met in the prior year.
A similar regime also applied from 1 April 23 albeit with a 40% R&D expenditure threshold and no requirement to be loss making.
The company must be seeking an overall advance (or appreciable improvement) in technology or science via the resolution of technological or scientific uncertainty.
What is qualifying R&D?
Examples of qualifying R&D activities might include:
- Challenging developmental activities that go beyond known techniques
- Developing new materials, products or manufacturing processes that offer improved performance, increased outputs and efficiencies, or reduced waste, costs etc.
- Iterative development or ‘trial and error’ – note that the R&D doesn’t have to be successful to qualify
- Application of an existing technology in a new field of science, where the competent professionals did not know whether it was feasible / how to achieve it in practice
Patents are a good indication that qualifying R&D may have taken place.
Qualifying costs
Once eligible R&D activities are understood, the associated costs can be identified.
Qualifying costs can include:
- staff costs
- contracted R&D undertaken in the UK
- payments for Externally Provided Workers (agency staff) based in the UK
- consumable items including prototypes and materials used up as part of the R&D
- software licenses, data licences, cloud computing services and utilities
Note, contracted R&D and Externally Provided worker costs qualify providing they are undertaken in the UK (or necessarily undertaken overseas). These costs are restricted to 65% of the total expenditure.
Claim value
ERIS is given as an additional tax deduction of 186% of the qualifying spend, which can be surrendered for a repayable credit at 14.5%. This results in a net cash tax benefit of 27%.
Cash repayments are usually capped to £20k plus 300% of the company’s PAYE/NIC payments for an accounting period. Companies with few employees may have their repayment restricted by this although there is a cap exemption for companies whose employees are wholly or mainly creating or managing intellectual property.
How to claim
Claims are made annually for each accounting period as part of a company’s tax return.
An online ‘Additional Information Form’ summarising the claim must also be filed prior to the tax computations.
Companies have 2 years to file claims, for example a December 2025 year end claim must be filed by 31 December 2027.
Subject to the pre-notification requirement (below), preparing 2 years claims together is often most efficient, minimising the time required from the business.
Pre-notification requirement
Note, a new ‘pre-notification’ requirement was introduced for accounting periods commencing on or after 1 April 23 (so accounting periods ended 31 March 24 onwards). The deadline for pre-notifying is 6 months after the end of the relevant accounting period. If claims have already been filed within a 3 year window, pre-notification is not required.
A word of caution
- ERIS cannot be claimed for R&D contracted to the company (although there is no restriction on subsidised expenditure);
- How costs are accounted for can impact claims – consult early to ensure this isn’t a problem.
- Some SME claimants are facing time consuming ‘volume’ based enquiries performed by HMRC’s Individual Small Business Compliance team currently. It is worth ensuring you file robust claim documentation upfront to minimise the risk of an enquiry.
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