Andy RoyceR&D Senior Manager

Andy plays a vital role in communicating R&D tax strategies to ensure optimal client value, whilst providing practical solutions to highly-technical tax legislation.

RDEC is an R&D incentive aimed at large businesses. As the UK Government looks to encourage and reward scientific and technological innovation, it provides tax relief to UK organisations that carry out and spend on qualifying R&D.

In this article, we take a deeper look at the benefits offered by the RDEC scheme, who and what qualifies for RDEC tax credit, the RDEC seven steps, and the process of how to make an RDEC claim.

Through the RDEC (research and development expenditure credit) scheme, the UK Government aims to reward and encourage innovation. It provides tax relief to UK organisations that are subject to Corporation Tax and who carry out eligible R&D activities. The RDEC tax credit is worth 13% of qualifying R&D expenditure and can be backdated by two financial years.

What is RDEC?

The RDEC (research and development expenditure credit) scheme is a UK Government incentive to encourage and reward innovation. It allows a company to discharge its corporation tax liabilities, backdated to 2 financial years, which means you can qualify for relief on profit as well as loss. The current RDEC rate is 13% on eligible R&D projects. For qualifying expenditure occurring on or after 1st April 2023, the new rate of 20% will apply.

The most up-to-date stats from September 2022 show that between 2020-21:

  • 10,475 RDEC claims were made
  • 62 per cent of RDEC claims made by SMEs
  • £2.4 billion in relief awarded through RDEC
  • £56,283 average SME RDEC claim

What are the benefits of RDEC?

Many organisations wrongly believe that they do not qualify for RDEC because they are not turning a profit. Under RDEC, the benefit of R&D is accounted for within the profit and loss account – above profit before tax. This means the scheme provides one major benefit: RDEC is counted as above-the-line credit

Organisations that are making a loss can benefit from their R&D efforts and demonstrate stability. The benefit comes either in a liability reduction through Corporation Tax or via direct payment from HMRC.

Please note: as announced in the Autumn Statement 2022, Corporation Tax is changing. From April 2023, companies with profits under £50k will be taxed at a rate of 19%, while companies with profits over £250k will be taxed at a rate of 25%. Companies with profits between £50k – £250k will be subject to Marginal Relief.

What is the current RDEC rate?

The current RDEC rate is 13% of the qualifying R&D expenditure. From April 2023 the RDEC rate will increase to 20%, as announced in the Autumn Statement 2022.

For example:

Before April 2023

Estimated R&D spend: £100,000
X Enhancement rate @ 13%
= £113,000 (above-the-line credit)
– Corporation Tax @ 19%
= £91,530 (after tax benefit)

After April 2023

Profits up to £50k
Estimated R&D spend: £100,000
X Enhancement rate @ 20%
= £120,000 (above-the-line credit)
– Corporation Tax @ 19%
= £97,200 (after tax benefit)

Profits over £250k
Estimated R&D spend: £100,000
X Enhancement rate @ 20%
= £120,000 (above-the-line credit)
– Corporation Tax @ 25%
= £90,000 (after tax benefit)

Please note: the RDEC rate is subject to change and is announced within The Budget. The most up-to-date Government guidance can be found here.

To get a better understanding of what you could be entitled to, calculate your R&D tax credit here.

Who can qualify for RDEC?

The RDEC scheme is primarily designed for large organisations. This is defined as those that employ more than 500 staff, have a turnover exceeding €100m or own more than €86m in gross assets. Additionally, these organisations must carry out and spend money on qualifying R&D activities, and pay UK Corporation Tax.

However, there are circumstances where SMEs must make claims under the RDEC scheme:

  • The R&D project is subsided
  • State Aid has been applied/received for the R&D project
  • A large company has subcontracted the R&D project

What activities qualify for RDEC?

The Department for Business, Energy and Industrial Strategy, which publishes the guidelines for the RDEC incentive, is very clear about what constitutes as qualifying R&D:

  • R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology
  • The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D
  • Certain qualifying indirect activities related to the project are also R&D

R&D for tax purposes doesn’t have to mean reinventing the wheel: it’s also solving problems that your business faces on a day-to-day basis in a new way, or having to overcome a challenge that doesn’t have a straightforward solution.

If you’re taking a risk by spending money on creating new products, processes, services, or knowledge (or developing and improving what already exists) then it’s likely that you’re carrying out R&D which RDEC can reward.

What expenditure qualifies for RDEC?

Once qualifying activities have been identified, there are specific types of expenditure that can be claimed under RDEC. These are:

  • Staff costs, including a proportion of salaries, employer’s National Insurance (NI) and pension contributions
  • Payments made to external agencies – both long and short-term, and personal service companies. If provided by an unconnected company, payments are capped at 65%
  • Subcontractor costs if they are incurred by a charity, higher education institute, scientific research organisation, health service body, or an individual or partnership of individuals. Payments to unconnected individuals or partnerships are capped at 65%
  • Expenditure on consumables including light, power and heat that are consumed or transformed during the R&D process, or materials use for the development of prototypes
  • Costs for software involved in R&D activities; from 2023, cloud computing costs and data costs can also be included in claims
  • Payments to volunteers in clinical trials – this is most relevant to claims from the pharmaceutical industry

Expenditure that is NOT covered under RDEC includes:

  • The production and distribution of goods and services
  • Capital expenditure
  • Rent and rates
  • Legal costs associated with patents and trademarks
  • Subcontractor payments to companies and other bodies not mentioned in the definition above

For more information on claiming R&D capital allowances, click here. This can include tax relief for equipment, property and staff vehicles used in connection with R&D activities. They are often claimed alongside RDEC.

If your company holds any patents, you could be eligible for Patent Box relief.

What are the RDEC seven steps?

To ensure an RDEC claim is successful, the organisation must follow the RDEC seven steps:

  • Discharge any corporation tax liabilities
  • Apply the tax rate of 19%; note that this is applied whether the company is loss-making or not
  • Limit the credit to the R&D PAYE/NIC cap – any excess can be carried over
  • Honour corporation tax liabilities
  • Surrendering the credit for group relief (optional)
  • Honour other tax liabilities, such as unpaid VAT or PAYE
  • Credit paid after HMRC tests

How to make an RDEC claim for large companies

You can claim R&D expenditure credit using the full Company Tax Return form (CT600).

Whilst not required, you should also include a summary paragraph to highlight the criteria under which the project’s activities constitute R&D to prove eligibility. As well as financial analysis to show how the R&D expenditure credit calculation was done:

How to make an RDEC claim for SMEs

Although SME R&D projects can be claimed under RDEC, it is not as beneficial. The UK Government offers a better alternative – the SME incentive – which allows businesses relief on up to 33.35% of their development costs.

Please note: as announced in the Autumn Statement 2022, The SME Incentive rate will be changing. From 1st April 2023, the SME additional deduction will decrease from 130% to 86%, and the credit rate will decrease from 14.5% to 10%.

An SME for R&D tax purposes is defined as having less than 500 staff and a turnover of under €100 million or a balance sheet total of less than €86 million. Connected and partner companies attached to your business might impact this and you cannot claim SME relief if you have been subcontracted by another company – although you can still claim RDEC.

It may be that different R&D projects are eligible for different schemes, which is why it’s important to identify relevant projects. Whilst not mandatory, it’s a good idea to produce a technical narrative (no more than five pages) to explain the development process in more detail to prevent any issues with the RDEC claim.

SMEs then follow the same process as large companies to claim R&D expenditure credit using the full Company Tax Return form.

FAQs

Is RDEC state aid?

No, unlike the SME scheme, RDEC is not a form of state aid. RDEC is a tax incentive to promote innovation. The UK Government has committed to spending £22bn by 2025 to support large companies with their R&D efforts, which in turn will boost the UK’s competitiveness on a global scale.

What does RDEC stand for?

RDEC stands for ‘research and development expenditure credit’.

Can an SME make an RDEC claim for independent research?

Yes. Unlike The SME Incentive, RDEC does allow organisations to claim contributions to independent research.

Can I apply for RDAs and REDC?

Research and Development Capital Allowances (RDAs) and RDEC are completely different schemes but when the costs are claimed from one scheme, they cannot be claimed in the other.

Can I apply for Patent Box credit and RDEC?

Yes. Although the RDEC scheme and the Patent Box scheme are different (Patent Box allows UK companies with ownership/licensing rights to reduce Corporate Tax on some of the profits by 10%) they can be combined to significantly reduce tax liabilities.

What happens to capped RDEC claims?

While HMRC does cap the credit to the total value of the PAYE and NIC contributions for the workers involved in this RDEC claim, any excess amount can be carried over to the following year’s claim period.

What is the accounting treatment for RDEC?

The RDEC tax credit is taxable at the normal Corporation Tax Rate (19%), and you should show it as income when calculating your pre-tax profit – this is why the RDEC relief is sometimes referred to as “above-the-line” credit. Find out more here about accounting treatment for RDEC.

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