Enhanced R&D Intensive Support: Does Your Loss-Making Company Meet The 30% Test?
Enhanced R&D Intensive Support: Does Your Loss-Making Company Meet the 30% Test?
To qualify for Enhanced R&D Intensive Support (ERIS) in the 2026/27 tax year, a loss-making small or medium-sized enterprise (SME) must show that its qualifying R&D expenditure represents at least 30% of its total relevant expenditure for the accounting period, a threshold that has applied to accounting periods beginning on or after 1 April 2024, down from the original 40% figure. HMRC's own manual on the R&D intensity condition sets out a formula that is more technical than most summaries suggest, and getting it wrong, in either direction, either denies a company relief it was entitled to or produces a claim HMRC later challenges.
I have sat across the table from enough founders convinced they were comfortably above 30% to know this calculation catches people out regularly, usually because they have measured intensity against the wrong denominator, or forgotten that a connected company's spending has to be folded into both sides of the ratio even where that company makes no R&D claim of its own.
The Formula Behind the 30% Test
The intensity ratio is calculated as relevant R&D expenditure divided by total relevant expenditure, and HMRC's guidance is precise about what belongs in each figure. This is not simply "R&D spend as a proportion of turnover" or "R&D spend as a proportion of costs on the profit and loss account", and treating it as either of those shortcuts is one of the most common sources of an inaccurate claim.
What Counts as Relevant R&D Expenditure
Relevant R&D expenditure is the claimant company's own qualifying R&D expenditure, combined with the qualifying R&D expenditure of any connected companies, whether those companies are based in the UK or overseas. Crucially, the connected company's expenditure is included in this figure regardless of whether that company actually makes an R&D claim itself. A group structure where one entity does the qualifying research and a separate, connected entity holds unrelated trading activity cannot simply ignore the second entity when calculating intensity. Both are pulled into the same aggregate figure.
What Counts as Total Relevant Expenditure
Total relevant expenditure is broader, and this is where most miscalculations happen. It comprises the expenditure brought into account under generally accepted accounting practice in calculating the company's trading profit, meaning amounts appearing above the "profit before tax" line in the profit and loss account, plus any amount for which the company is entitled to relief under the specific R&D relief provisions, plus certain amounts relating to R&D expenditure capitalised as an intangible fixed asset under section 1308 of the Corporation Tax Act 2009. From this figure, any amortisation added back under that same section is excluded, to prevent the same underlying cost being counted twice, and any expenditure representing a payment or other transfer of value to a connected company is also stripped out, again to avoid double-counting within a group.
The practical effect is that total relevant expenditure is closer to the company's genuine trading cost base for the period than to its accounting turnover, and group payments between connected entities need to be identified and removed carefully rather than left sitting in the figure by default.
What this Widget is About: This interactive visual calculator, designed by Pro Tax Accountant, enables UK small and medium-sized enterprises to determine whether their loss-making business satisfies the statutory 30% R&D intensity condition for Enhanced R&D Intensive Support (ERIS). It demystifies HMRC’s complex aggregation rules by modelling your qualifying research expenditure, broader trading cost base, and connected group entities to reveal your precise intensity ratio and potential cash tax credit. To use the tool, simply enter your company’s financial figures—or select a pre-loaded case study—adjust for any intra-group transactions or PAYE/NIC thresholds, and review your instant eligibility status alongside a comparison against the default Merged R&D Scheme.
The "Loss-Making Before Enhancement" Test: A Detail That Tightened in 2024
A separate condition, distinct from the intensity ratio itself, is that the company must be loss-making, and the definition of loss-making changed meaningfully when the 30% threshold came into force. For accounting periods beginning on or after 1 April 2024, a company must have a tax loss before the R&D enhanced deduction is applied, a stricter test than the one that applied under the earlier 40% threshold, where a company only needed to be loss-making after the enhancement had already been factored in.
This distinction matters more than it might first appear. A company sitting close to break-even on an unenhanced basis, but which becomes clearly loss-making once the R&D super-deduction is applied, no longer automatically qualifies for ERIS under the current rules in the way it might have done under the transitional position that applied briefly during 2023 and early 2024. Anyone reviewing older commentary on ERIS eligibility, including material written before the 30% threshold took effect, should treat this specific point with caution, since it changed at the same time as the intensity percentage itself.
A Worked Example on the Borderline
Take a medical devices company developing a diagnostic sensor. For the accounting period, its profit and loss account shows total trading expenditure of £1,150,000, and it has a wholly owned overseas subsidiary providing specialist testing services, connected for these purposes, whose own qualifying R&D expenditure is £95,000, with total trading expenditure of £310,000. The parent company's own qualifying R&D expenditure for the period is £245,000.
Relevant R&D expenditure is the parent's £245,000 plus the subsidiary's £95,000, giving £340,000. Total relevant expenditure starts from the parent's £1,150,000 plus the subsidiary's £310,000, giving £1,460,000, from which any intra-group payments between the two entities must be deducted. Suppose the parent pays the subsidiary £180,000 during the period for testing services already reflected in both companies' figures. Removing this to avoid double-counting brings total relevant expenditure down to £1,280,000.
The resulting intensity ratio is £340,000 divided by £1,280,000, which comes to just under 26.6%, below the 30% threshold. Despite the company's own instinct that "a third of everything we spend goes on the sensor programme," the inclusion of the subsidiary's broader cost base, even after removing the intra-group payment, pulls the ratio down below the line. This company would claim under the merged scheme rather than ERIS for this period, at a materially lower net benefit, and the difference between the two outcomes in this example runs into tens of thousands of pounds.
The One-Year Grace Period
Where a company met the intensity threshold and made a successful ERIS claim, or a claim under the equivalent earlier version of the SME scheme, for its immediately preceding 12-month accounting period, but its intensity ratio then drops below 30% in the following period, a one-year grace period generally allows it to continue claiming ERIS for that single transitional year. This is a genuine cushion against ordinary year-on-year fluctuation in spending patterns, rather than a permanent exemption, and it does not apply to a company falling below the threshold for a second consecutive period, which reverts to the merged scheme from that point.
The grace period only helps if the company actually claimed ERIS, or its earlier equivalent, in the prior period. A company that was intensity-eligible in the prior year but chose, for whatever reason, not to claim ERIS that year cannot rely on the grace period the following year simply because it was theoretically eligible before.
Connected Companies: The Trap for Group Structures
The requirement to aggregate connected company figures, applied to both sides of the ratio, is the single detail most likely to change the outcome of a borderline calculation, and it is frequently underestimated by founders running a lean, single-entity mental model of their business even where a second dormant or lightly active company sits in the background. HMRC's definition of connection for this purpose follows the ordinary corporate connection rules, broadly control by the same person or persons, and applies regardless of where the connected entity is incorporated or whether it carries out any R&D of its own.
A practical consequence worth flagging directly: setting up a separate holding company, or spinning out a non-R&D trading arm into its own entity, does not remove that entity's expenditure from the intensity calculation if the two remain connected. Genuine group restructuring undertaken specifically to influence an ERIS calculation, without any underlying commercial rationale, is also the kind of arrangement HMRC's compliance teams are increasingly alert to when reviewing claims.
What this Widget is About: This interactive visual explainer helps UK taxpayers and company founders determine whether their loss-making SME qualifies for Enhanced R&D Intensive Support (ERIS) by meeting the 30% R&D intensity test for accounting periods beginning on or after 1 April 2024. It clearly breaks down the precise HMRC formula, the treatment of connected companies, the stricter loss-making condition, the one-year grace period, the PAYE/NIC cap and Northern Ireland rules, using straightforward language, a worked example and practical next steps. Simply click through the tabs to explore each topic and use the built-in calculator to enter your approximate figures for an instant indication of whether you sit above or below the 30% threshold. Created by Pro Tax Accountant, the widget is an educational tool only and should always be followed by professional advice tailored to your specific circumstances.
The PAYE and NIC Cap on Payable Credits
Even where the 30% test and the loss-making condition are both satisfied, the payable credit available under ERIS is not unlimited. It is capped at £20,000 plus 300% of the company's relevant PAYE and National Insurance contributions liability for the period, unless a specific exemption applies. For an early-stage company with a small payroll relative to its R&D spend, perhaps because a significant proportion of qualifying costs relate to externally provided workers or subcontractors rather than direct employees, this cap can restrict the cash actually received even where the underlying intensity and loss calculations comfortably support a larger claim. Reviewing the interaction between payroll structure and the PAYE cap before finalising a claim is worth doing early, since restructuring how R&D work is resourced, employees rather than contractors, for example, can materially affect the cap in future periods.
Northern Ireland's Distinct Position
Companies with a registered office in Northern Ireland claiming ERIS operate under additional provisions that do not apply elsewhere in the UK, reflecting post-Brexit subsidy control obligations. The credit is treated as de minimis State aid, subject to a cap of €300,000 over a rolling three-year period, though this cap applies specifically to the additional relief received under ERIS insofar as it exceeds what an equivalent claim under the merged scheme would have delivered, rather than to the full ERIS credit itself. A further difference worth noting is that the general restriction on overseas third-party costs, which applies to merged scheme and ERIS claims elsewhere in the UK, does not apply in the same way to companies registered in Northern Ireland claiming ERIS, a nuance that regularly surprises advisers more familiar with the England, Scotland, and Wales position.
Scotland and Wales: No Separate Rules
Outside the specific Northern Ireland provisions described above, the 30% intensity test, the loss-making condition, and the ERIS payable credit rate apply identically to companies in Scotland, Wales, and England, since Corporation Tax and R&D relief are matters reserved to the UK government rather than devolved. There is no separate Scottish or Welsh intensity threshold or calculation method, and a company's registered office or trading location within Great Britain has no bearing on how the ratio is worked out.
Practical Steps Worth Taking
● Calculate the intensity ratio using the precise statutory definitions of relevant and total relevant expenditure, not a rough proxy based on turnover or headline R&D spend, since the two can produce materially different results.
● Identify every connected company, in the UK or overseas, and pull its expenditure into both sides of the calculation, even where that company makes no R&D claim of its own.
● Confirm whether the company is loss-making before the R&D enhancement is applied, since this is a stricter test than the one that applied before the 30% threshold took effect.
● Where the ratio sits close to 30%, consider modelling the calculation slightly ahead of the year end, since spending decisions made in the final months of the accounting period can still influence the outcome.
● Review payroll structure against the PAYE and NIC cap early, particularly where a significant share of qualifying R&D cost relates to contractors or externally provided workers rather than direct employees.
Key Takeaways
The 30% test looks like a simple percentage, but the mechanics behind it, the treatment of connected companies, the specific definition of total relevant expenditure, and the tightened loss-making condition introduced alongside the current threshold, mean the actual outcome is often less intuitive than a founder's own sense of how R&D-focused the business is. Getting this calculation right before submitting a claim, rather than after HMRC raises a query, is the difference between a payable credit worth roughly 27p per pound spent and one worth roughly 15p, a gap that matters enormously to a company that is, by definition, not yet profitable.
FAQs
What is the R&D intensity threshold for ERIS in 2026/27?
A loss-making SME must show that its relevant R&D expenditure represents at least 30% of its total relevant expenditure for the accounting period, a threshold that has applied since accounting periods beginning on or after 1 April 2024.
How is R&D intensity actually calculated?
It is relevant R&D expenditure (the claimant's qualifying R&D costs plus those of any connected companies) divided by total relevant expenditure (broadly the company's trading costs under GAAP, plus certain capitalised R&D amounts, minus intra-group payments and specific amortisation add-backs).
Do I have to include a connected company's expenditure even if it doesn't claim R&D relief itself?
Yes. A connected company's qualifying R&D expenditure and total expenditure are both included in the intensity calculation regardless of whether that company makes its own R&D claim, and regardless of whether it is based in the UK.
What does "loss-making" mean for ERIS eligibility?
For accounting periods beginning on or after 1 April 2024, the company must have a tax loss before the R&D enhanced deduction is applied, a stricter test than the one that applied under the earlier 40% threshold.
What happens if my intensity ratio drops below 30% after I've previously claimed ERIS?
A one-year grace period generally allows continued ERIS claims for a single transitional year, provided the company met the threshold and successfully claimed ERIS, or its earlier equivalent, in the immediately preceding 12-month accounting period.
Is there a limit on how much ERIS credit my company can actually receive?
Yes. The payable credit is capped at £20,000 plus 300% of the company's relevant PAYE and National Insurance contributions liability for the period, unless a specific exemption applies, regardless of how large the underlying enhanced deduction is.
Does Northern Ireland have different ERIS rules? Yes. Companies registered in Northern Ireland face a separate de minimis State aid cap of GBP300,000 over a rolling three-year period on the additional relief above what an equivalent merged scheme claim would provide, and the general restriction on overseas third-party costs does not apply to their ERIS claims in the same way.
Are the ERIS rules different in Scotland or Wales?
No. Corporation Tax and R&D relief, including the 30% intensity test, are reserved matters, so companies in Scotland, Wales, and England follow identical rules with no separate devolved threshold or calculation.
Can I choose to claim under the merged scheme even if my company qualifies for ERIS?
Yes. A company that meets the ERIS conditions can still elect to claim under the merged scheme instead, though it cannot claim both schemes for the same expenditure, and doing so would generally mean accepting a lower net benefit than ERIS would have provided.
About the Author:
Adil Akhtar, ACMA, CGMA, FCMA (membership ID is 990250923) serves as CEO and Chief Accountant at Pro Tax Accountant, bringing over 18 years of expertise in tackling intricate tax issues. As a respected tax blog writer, Adil has spent more than eighteen years delivering clear, practical advice to UK taxpayers. He also leads Advantax Accountants (registered with Companies House), combining technical expertise with a passion for simplifying complex financial concepts, establishing himself as a trusted voice in tax education.
Email: adilacma@icloud.com
Disclaimer: This article sets out the general position under UK tax law for the 2026/27 tax year. The information has been checked against HMRC guidance and other official sources at the date shown above, and is reviewed when the rules change. Tax legislation is complex and outcomes depend on your individual circumstances, so this article is provided for general information and does not constitute advice on which you should act. Any figures or worked examples are illustrative. Before making any decision, obtain advice specific to your situation from a qualified professional. Pro Tax Accountant accepts no liability for loss arising from reliance on this article alone.
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