Merged R&D scheme and enhanced R&D intensive support (ERIS) – New guidance
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As we’ve known since last summer, 1st April 2024 saw HMRC launch the new merged scheme R&D expenditure credit, replacing the current SME and RDEC schemes. Alongside this, enhanced R&D intensive support (ERIS) will be available to some SMEs, replacing the current R&D intensive SME scheme. Companies based in Northern Ireland will be able to claim under the new merged scheme or through ERIS, the latter having specific rules for NI-based companies.
Ahead of this, HMRC released guidance about how to claim under each of these new schemes, clarifying some of the rules whilst adding some complications in other areas. Here’s our summary what you need to know about each of the schemes:
Merged scheme
Quick clarification before we start – HMRC refer to the new merged scheme as RDEC, or merged scheme RDEC, so we’ll be using their terminology from now on.
The merged scheme RDEC guidance was published in March 2024, and sets out, at a high level, how companies can claim this support. Very little about the merged scheme RDEC has changed since it was first legislated for, with the main points being:
- It applies to claim periods starting on or after 1st April 2024;
- It gives an expenditure credit of 20%, in the same way as the current RDEC;
- The merged scheme uses the current SME PAYE/NIC cap rules;
- Subcontractor costs are allowable for all claimants, including Large Companies;
- Overseas contractor costs are not allowable, unless exempt from the ban;
- Payments for EPWs only qualify if they are subject to UK PAYE;
- The definition of R&D and what constitutes eligible activities has not changed.
The guidance does clarify some points that hadn’t been covered in previous announcements. This includes:
- The tax rate payable on the merged scheme RDEC
Claimants with total profits of less than £50,000 will pay the lower notional of 19%, and all other companies will pay at the 25% rate.
- The treatment of contractor costs
While this has been covered elsewhere, HMRC reiterate in this guidance that the party that takes the decision to undertake R&D will be able to claim for that work in most circumstances.
- The seven-step process for claiming merged scheme RDEC
This process is very similar to the process for claiming RDEC under the old scheme, and requires companies to use the credit to pay off all liabilities to HMRC before receiving a cash payment.
Enhanced R&D Intensive Support
Enhanced R&D intensive support (ERIS) replaces the R&D intensive SME scheme. The ERIS guidance is contained with the same document as the new merged RDEC guidance, as the rules are the same for both schemes. The key point that you need to know about ERIS are:
- It is only available to SMEs who are loss-making before any additional R&D deduction is taken;
- To qualify, the claimant company’s R&D spend must be more than 30% of the total trading and operating expense for the period and;
- If the claimant company has any connected companies, the R&D spend and total trading and operating expenditure of all connected companies must be taken into account when assessing whether the intensive criteria has been met.
ERIS is claimed in the same way as the previous SME R&D tax credit – the eligible expenditure is multiplied by 186% to get the enhanced expenditure amount. This, or the unrelieved trading loss, whichever is lower, can then be surrendered for a 14.5% tax credit.
Loss-making SMEs can choose to claim the merged scheme RDEC or ERIS, but the same expenditure cannot be claimed under both schemes.
ERIS and companies registered in Northern Ireland
Alongside the new guidance for the merged scheme and ERIS, HMRC published guidance for R&D intensive SMEs with a registered office in Northern Ireland. These companies can access a specific set of rules, allowing them to claim relief on payments made to overseas contractors or for overseas EPWs.
This extra benefit is capped and only applies to loss-making SMEs who meet the ERIS criteria. The cap is based on the difference between what could have been claimed under the merged scheme versus the benefit claimed under ERIS. This difference in benefit cannot exceed £250,000 over a three-year rolling period.
These companies can still choose to claim merged RDEC rather than ERIS, and companies that do not trade in goods or carry out relevant activities related to electricity can choose to opt out and claim under the standard ERIS rules. This enables opted-out companies to claim uncapped relief, but prevents then claiming for overseas R&D costs.
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