The intensity condition is the gateway to Enhanced R&D Intensive Support: a loss-making SME (measured before the additional deduction is taken) qualifies only where its relevant R&D expenditure is at least 30% of its total relevant expenditure for the period. Pass it and the claim is worth up to 26.97p per £1 of qualifying spend, tax free; miss it and the company claims the merged scheme instead at 16.2p in cash. Few thresholds in the tax system carry that much value on a single percentage point.
If you want the arithmetic on your own figures, the ERIS intensity calculator works the ratio out on a basis that includes your connected companies.
How the ratio is counted
Both sides of the ratio come from the accounts, and neither is quite what people first assume. The numerator is the company’s relevant R&D expenditure; the denominator is its total relevant expenditure — broadly, everything brought into account in calculating profit under generally accepted accounting practice, which is not turnover and includes costs that are disallowable for tax. A payment, or other transfer of value, to a connected company is excluded from the count, which stops intra-group recharges being counted twice; the statutory words are wider than cash paid on an invoice. And the test is not run on the company alone: connected companies worldwide are counted on both sides of the ratio, so a trading subsidiary with heavy non-R&D costs can dilute the intensity of the group’s development company below 30% even though the development company on its own sits far above it. Connection is tested across the whole period rather than at a point in it — a company connected with another on any day within the period counts as connected for the period — so a subsidiary bought or sold part-way through the year still comes into the aggregation. Group structure decides marginal cases, and it needs checking before the claim is assumed, not after.
Intensity is not the only condition. ERIS also requires the company to be an SME on the R&D definition, to be making a trading loss, and not to be an ineligible company — the statutory term for a charity, an institution of higher education, a scientific research organisation or a health service body.
The threshold has moved once already, which still confuses claims for earlier periods: it was 40% when R&D-intensive support was introduced for expenditure from 1 April 2023, and fell to 30% for accounting periods beginning on or after 1 April 2024 under ERIS. Guidance written in 2023 quotes the old figure.
The grace period
A one-year grace period protects companies whose intensity dips below 30%, so a single softer year, a hiring round or a revenue spike that swells total spending, does not immediately cost the enhanced rate. Its conditions are specific. Two things must be true of the company’s most recent prior accounting period of twelve months’ duration: it met the intensity test in that period, and it obtained relief for it. It must also still be loss-making in the grace year. Eligibility without a claim banks nothing. Where the earlier period began before 1 April 2024, the threshold it had to clear was 40%, and a period ending before 1 April 2023 does not count at all. The relief has to have been SME scheme relief or ERIS; a merged scheme claim does not bank the grace period. The lookback is to the most recent twelve-month period rather than simply the preceding one, so a short period in between does not break the link. It runs one way: it holds ERIS for a company that has already claimed, it does not help a company reach the threshold in the first place. Companies hovering near 30% should model the ratio before the year end, while spending decisions can still move it.
What passing is worth
ERIS works through an additional 86% deduction, 186% in total, and a payable credit of 14.5% of the surrenderable loss: on £100,000 of qualifying spend, £100,000 × 186% × 14.5% = £26,970 in cash, assuming sufficient losses and no cap restriction, and the credit is not taxable. The payable credit is subject to the PAYE cap of £20,000 plus 300% of relevant PAYE and NIC, and the statute gives the company the lesser of 14.5% of the surrenderable loss and that cap, so the cap limits what is paid rather than voiding entitlement. The contrast with the merged scheme is what happens to the excess. There, an over-cap amount is carried forward as credit for the next accounting period. ERIS has no equivalent: the capped excess is not paid as credit at all, and HMRC’s manual goes further still, treating a claim above the cap as invalid.
The loss behind the credit need not be written off, but keeping it means surrendering less: only the amount actually surrendered is written off, and the balance carries forward for relief against future profits. Either way the cap needs checking before the claim is sized.
Where to go next
Test your own ratio with the ERIS intensity calculator, then read the full ERIS guide for the conditions around it. If your intensity sits anywhere near the line, or your group structure makes the arithmetic unclear, that is precisely the case to take advice on early.
Sources
- R&D tax relief: the merged scheme and ERIS — the intensity condition, rates and grace period.
- CIRD123000: ERIS — HMRC’s manual on the intensity calculation and the other ERIS conditions, including the ineligible company condition.
- Section 1045ZA, Corporation Tax Act 2009 — the ratio, the exclusion of a payment or other transfer of value to a connected company, and connection on any day in the period.
- Section 1058, Corporation Tax Act 2009 — the credit as the lesser of 14.5% of the surrenderable loss and the PAYE and NIC cap.
- Finance Act 2024, Schedule 1, paragraphs 20 and 21 — the grace-period lookback to periods beginning before 1 April 2024, read with a 40% threshold and limited to periods ending on or after 1 April 2023.
- CIRD140000: PAYE cap — the merged scheme carry-forward and HMRC’s position on an ERIS claim above the cap.
This page describes the rules as they stood at the review date above, as general information rather than advice on your circumstances. For how that distinction works, see our terms; for an answer on your own facts, talk to us.