For a loss-making startup ploughing most of its budget into engineering and product, the R&D tax regime has a specific route that preserves the more generous SME benefit: Enhanced R&D Intensive Support, known as ERIS. This guide explains the two gates that must both be met, works through the intensity arithmetic, and shows the cash benefit for an illustrative software company.
What ERIS is and who qualifies
Enhanced R&D intensive support (ERIS) keeps the SME route open for a loss-making SME whose qualifying R&D spend is at least 30% of total expenditure, giving an 86% additional deduction plus a payable credit at 14.5% on that qualifying spend. Without ERIS, a loss-making SME would fall into the merged scheme and receive a 20% above-the-line taxable credit instead. ERIS is the reason a capital-intensive, pre-revenue software company can get a materially larger R&D repayment than a profitable competitor would receive under the standard route.
ERIS is not available to profitable companies. It is not a general enhancement. It applies only where both conditions are satisfied in the same accounting period: the company is loss-making, and qualifying R&D spend reaches or exceeds 30% of total expenditure.
The two gates: loss-making AND at least 30% R&D-intensive
Both conditions must be met simultaneously in the relevant accounting period. Satisfying one without the other means the company falls into the merged scheme, not ERIS. Loss-making here means the company has a trading loss after accounting for the R&D deductions. The 30% intensity threshold is assessed on the figures for that same period.
A company that swings into profit in a given period cannot use ERIS for that period even if its R&D spend is very high. Equally, a loss-making company whose R&D spend is only 20% of total expenditure does not qualify, even if the absolute spend is large.
If your company is borderline on either test, the position is worth modelling before the accounting period closes. Expenditure timing can affect both the intensity ratio and the loss position, and the interaction matters.
How the 30% intensity ratio is calculated
The intensity ratio is: qualifying R&D expenditure divided by total expenditure for the accounting period. The result must be at least 30% (0.30) for the ERIS route to be available.
The numerator is the company's qualifying R&D expenditure for the period: the same expenditure categories that feed the R&D claim itself, including staff costs, subcontractor costs, consumables, software licences used in the R&D project, and cloud compute costs attributable to qualifying R&D activities. Expenditure must meet the advance-in-science-or-technology test; routine development does not count.
The denominator is total expenditure for the period. As a general principle this covers the total costs of the company for the period. The HMRC SME guidance sets out the precise definition. One area flagged as complex in that guidance is connected-company aggregation: where a company has connected companies, their expenditure may need to be included in the denominator. This can reduce the apparent intensity ratio materially for a startup that is part of a wider group or has associated entities. If this applies to your structure, confirm the aggregation treatment before proceeding.
Because routine administrative and sales costs raise the denominator, a company whose headcount skews toward commercial rather than engineering roles will see its intensity ratio diluted. A pure-engineering pre-revenue company with minimal non-R&D costs is the clearest pass; a company with a large sales team or high distribution costs will need to work through the numbers carefully.
The ERIS benefit: 86% additional deduction and 14.5% payable credit
For an accounting period where both gates are met, ERIS gives an 86% additional deduction on qualifying R&D expenditure, plus a payable credit at 14.5%. The mechanics for a loss-making company work as follows.
The company deducts its qualifying R&D expenditure as normal in the computation. It then claims the additional 86% deduction on top of that same qualifying spend. Because the company is already loss-making, these deductions increase its loss. The company can then surrender that surrenderable loss to HMRC in exchange for a payable (cash) credit at 14.5% of the surrenderable loss amount.
The 86% figure is an additional deduction, not a top-up to the cost you have already deducted. On £100 of qualifying R&D spend, you deduct £100 as a cost and then claim a further £86 additional deduction, giving £186 of total deduction for that £100 of spend. For a loss-maker converting the resulting loss to a payable credit, the 14.5% rate applies to the surrenderable loss, which includes the enhanced deduction.
Worked example: a loss-making software startup
The following figures are illustrative. They are designed to show how the intensity test and the benefit calculation work in practice. Your actual figures will differ.
Company profile: Pre-revenue SaaS company, 12-month accounting period. Two founders and four engineers. Primary costs are engineering payroll and cloud compute used in developing qualifying software.
| Expenditure category | Amount | Qualifying R&D? |
|---|---|---|
| Engineering staff costs (4 engineers, 90% R&D time) | £360,000 | Yes (90% attributed) |
| Cloud compute costs attributable to R&D | £90,000 | Yes |
| Software licences used in R&D | £30,000 | Yes |
| Founder salaries (not directly in qualifying R&D) | £120,000 | No |
| Office, legal, and admin costs | £80,000 | No |
| Marketing and sales | £120,000 | No |
| Total qualifying R&D expenditure | £480,000 | |
| Total expenditure (all costs) | £800,000 |
Step 1: intensity test. £480,000 / £800,000 = 60%. This is well above the 30% threshold. Gate one passed.
Step 2: loss-making test. With zero revenue and £800,000 of costs, the company is loss-making. Gate two passed. ERIS applies.
Step 3: enhanced deduction. The 86% additional deduction applies to qualifying R&D expenditure of £480,000.
- Additional deduction: £480,000 × 86% = £412,800
- Total R&D deduction (cost + enhancement): £480,000 + £412,800 = £892,800
- Total loss for the period: £800,000 (trading costs) + £412,800 (enhancement) = £1,212,800 (actual figure depends on your full computation)
Step 4: payable credit. A loss-making ERIS company can surrender the enhanced loss (up to the surrenderable maximum) for a payable credit at 14.5%. Using the enhanced deduction as a proxy for the surrenderable element attributable to R&D:
- Surrenderable loss (R&D-attributable): £892,800
- Payable credit: £892,800 × 14.5% = £129,456
This is a cash repayment from HMRC to the company, not a credit against future profits. For a pre-revenue startup with no tax to offset, that distinction is critical: the payable credit converts an accounting loss into real cash.
The surrenderable loss calculation involves further rules, including a cap linked to PAYE and NIC costs. Confirm the precise surrenderable amount for your company before filing.
ERIS vs the merged scheme: which one you land in
The route you take depends on whether both ERIS gates are met in the period. The table below summarises the key differences.
| Merged scheme | ERIS | |
|---|---|---|
| Who qualifies | All companies (SME or large) that do not meet the ERIS criteria | Loss-making SME with qualifying R&D ≥ 30% of total expenditure |
| Headline mechanic | 20% above-the-line taxable expenditure credit | 86% additional deduction + 14.5% payable credit |
| Profitable company | Credit offsets corporation tax liability | Not available to profitable companies |
| Loss-making company | Credit can be surrendered for a cash repayment, with a cap | Enhanced loss surrendered for payable credit at 14.5% |
| Typical cash benefit on £100 qualifying spend (loss-maker) | Up to £20 credit (taxable, net effect lower) | Up to ~£26 payable credit (14.5% on £186 deduction), before PAYE cap |
For a full walkthrough of the merged scheme and how it works for companies that do not meet the ERIS criteria, see the merged R&D scheme guide.
Getting the claim right: eligibility, notification, and the AIF
Only qualifying R&D counts toward both the intensity numerator and the enhanced deduction, so run your workstreams through the software R&D eligibility guide before you rely on the ratio. The same two procedural steps apply as for any R&D claim: a first-time claimant must file a claim notification within 6 months of the period end, and the Additional Information Form must reach HMRC before the CT600.
If you want to model the likely benefit before committing to a claim, the R&D relief estimator lets you input your qualifying spend and total expenditure to see whether you pass the intensity threshold and what the indicative ERIS benefit looks like.
For founders at the pre-seed or early funded stage who are approaching their first accounting period end, the process is time-sensitive. The notification window opens as soon as the period closes. If your company is R&D-heavy and loss-making, talk to us early: the R&D claims service covers the full process from eligibility review through to AIF submission and CT600 filing. See also the pages for pre-seed founders and funded startups for broader context on how R&D relief fits into the wider tax picture at each stage.