What is the Research & Development Expenditure (RDEC) scheme and how can you claim?
We'd love to chat about your funding journey and how we can support you
What is RDEC?
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 tax credit?
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:
.webp)
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?
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.
Estimated R&D spend: £100,000
X Enhancement rate @ 13%
= £113,000 (above-the-line credit)
– Corporation Tax @ 19%
= £91,530 (after tax benefit)
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.
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 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:
Expenditure that is NOT covered under RDEC includes:
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:
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:
Can you make 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.
Find out if you qualify for R&D funding
Discover which UK government incentives your business could qualify for with our quick and easy self-assessment tool. In just a few minutes, you’ll receive a tailored report outlining the funding opportunities available to support your innovation and growth.
R&D tax credits, grants, Patent Box and R&D allowances are all schemes are designed to help ambitious businesses like yours thrive. Don’t leave potential funding untapped—it could be the key to fuelling your next big idea.
RDEC – FAQs
.webp)