Merged vs ERIS: Which R&D Tax Scheme Should I Use?

R&D tax credits have been under a microscope for months, with changes to the way claims are made and the rates that can be claimed. However, the largest change by far was the announcement of the new Merged Scheme.

For accounting periods beginning on or after 1 April 2024, all companies will have to use either the Merged Scheme or the Enhanced R&D Intensive Support scheme. These will replace the extant SME and RDEC schemes with a single method for calculating R&D tax credit claims that benefits all claimants in the same way.

Merged Scheme

The Merged Scheme forms part of HMRC’s latest efforts to simplify the process of claiming for R&D tax relief and increase the scope of claimable expenses. The vast majority of claimants will be using the Merged Scheme; the only exception is those that meet the requirements for the ERIS Scheme.

The claim is treated as taxable income and has a simpler process for being calculated compared to the previous SME scheme. It also has a more generous approach to subcontracted expenditure, which even large companies can now claim.

Who does it apply to?

The Merged Scheme must be used by any company making an R&D tax claim for an accounting period beginning on or after 1 April 2024, regardless of size or type of project. The only exception is for companies that are eligible to claim through the Enhanced R&D Intensive Support (ERIS) Scheme.

What’s the rate?

The headline rate of the expenditure credit is 20% of eligible costs.

As this is an above-the-line credit, companies can expect a real-world benefit of between 15% and 16.2%, depending on their corporation tax rate.

This can be claimed as a reduction in profits or companies can surrender their losses in return for a payable cash credit.

What can be claimed?

The full gamut of cost categories are now available to all claimants, including UK-based staff costs, UK-based contractors, UK-based externally provided workers (EPWs), consumable items, software licenses, cloud computing costs, data licenses and clinical trial volunteer payments can be claimed.

The eagle-eyed may have noticed that we specified “UK-based” staff, contractors and EPWs. This is because, for accounting periods beginning on or after 1 April 2024, R&D tax claims can no longer include overseas R&D expenditure. All staff, contractors and EPWs must conduct their work within the UK to qualify (regardless of the worker’s nationality or usual address, or the company’s registered country).

Enhanced R&D Intensive Support (ERIS) Scheme

In 2023, several changes were made to the R&D tax relief schemes, including the introduction of the Enhanced R&D Intensive Support (ERIS) Scheme in the Spring Budget, as an option for eligible companies alongside the existing SME Scheme. The ERIS Scheme was maintained alongside the introduction of the Merged Scheme.

The ERIS Scheme is available for expenditure incurred from 1 April 2023 and the treatment of the claim follows the previous SME Scheme more closely than the Merged Scheme.

Who does it apply to?

You can claim enhanced through the ERIS Scheme if your company:

• is a small or medium-sized enterprise (SME)
• makes a trading loss for tax purposes before relief is calculated
• meets the R&D intensity condition:
  • at least 40% for expenditure incurred on or after 1 April 2023
  • at least 30% for accounting periods beginning on or after 1 April 2024

Companies will need to meet the intensity threshold for the accounting period of the claim. However, there is a grace period for companies that met the threshold in the last accounting period and made a valid claim for SME or ERIS tax credits for expenditure incurred on or after 1 April 2023.

What’s the rate?

Making a claim through the ERIS Scheme means that companies can:

• deduct an extra 86% on qualifying expenditure from the trading profit for tax purposes, as well as the normal 100% deduction
• claim a payable tax credit at 14.5%

This results in a real-world benefit of 26.97%, which is higher than the 18.6% available to loss-making companies that do not qualify for ERIS.

What can be claimed?

The full set of cost categories are also available to those claiming through the ERIS scheme. The only difference is that for expenditure incurred from 1 April 2023 in an accounting period beginning before 1 April 2024, there is no overseas restriction.

However, for accounting periods beginning on or after 1 April 2024, the overseas restriction kicks in and all staff, contractors and EPWs must complete their R&D in the UK.

Questions? Download our eBook!

Still not sure what scheme your claim belongs under, or if your claim is eligible at all? Our R&D tax eBook should answer all your questions, from qualifying projects to how to submit your claim.

Download your free copy here.

Alternatively, get in touch with our experts for a free review of your claim.