R&D expenditure credits (RDEC) - what are they?

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    Rachel Wait

    Page written by Rachel Wait. Last reviewed on June 13, 2024. Next review due April 6, 2025.

    Research & development expenditure credits, or RDEC, were introduced by the UK government in 2013; they’re a tax incentive designed to help reward innovative businesses for investing in research and development (R&D).

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      What is RDEC?

      RDEC is one of two R&D tax credit schemes that are offered by the UK Government. The RDEC scheme replaced the Large Company scheme which was established in 2002. It sits alongside the SME R&D tax credit scheme which applies to small and medium-sized businesses (SMEs). 

      RDEC is available to large UK companies that incur costs related to R&D activities. It’s also available to some SMEs that don’t qualify for the SME R&D tax relief scheme, perhaps because of grants or subsidies. 

      RDEC can provide valuable support if you’re a business investing in innovation and developing new products, processes or services.

      How does RDEC work?

      If your company spends money on innovation, some of these costs are likely to be eligible for the RDEC scheme. 

      RDEC is given as a taxable credit on the amount of qualifying R&D expenditure and is payable either as a cash payment or a reduction in your corporation tax bill. It’s an above-the-line credit, which means it’s visible as income on your company’s Profit and Loss statement.

      To be eligible for R&D tax relief, your company must be working on an R&D project that seeks to achieve an advance in a field of science and technology. This advance could be creating new products, services or processes, or changing or modifying an existing one. 

      Your project should also be seeking to overcome scientific or technological uncertainty and requires research to investigate. You’ll need to be able to explain the work you did to overcome this uncertainty and why it could not easily be worked out by a professional in the field.

      Crucially, your R&D project doesn’t have to be successful to qualify.

      Key features

      • An RDEC tax credit is currently worth 20% of your qualifying R&D expenditure and can be backdated by two financial years.
      • The credit is taxable at the main corporation tax rate of 25%.
      • Companies can receive the credit as a cash payment or a reduction in their corporation tax bill.
      • The benefit can be shown above-the-line, which means it’s visible as income in your accounts. 
      • RDEC is designed for large companies as well as SMEs that don’t qualify for the SME R&D tax relief scheme.

      Benefits of RDEC

      The key benefit of RDEC is that it can be accounted for above-the-line in your income statement. This has the benefit of improving the profitability of your business.  

      Unlike the previous Large Company scheme, it also offers a cash credit for loss-making companies.

      What is the current RDEC rate?

      Companies currently receive 20% credit on their qualifying R&D expenditure. For expenditure before April 2023, the RDEC rate is 13%.

      As of 1 April 2023, the main corporation tax rate has increased from 19% to 25%, which now makes the net RDEC benefit roughly 15%. This means that 15p can be claimed back on every £1 of qualifying expenditure.

      The credit is either received as a cash payment or a reduction in your corporation tax bill.  

      What costs qualify for RDEC tax credits?

      There are certain types of expenditure that can be claimed under RDEC. These include:

      • Staff costs: This includes a proportion of salaries, employer’s National Insurance (NI) and pension contributions.
      • Subcontractor costs: Work must be undertaken by a charity, a health service body, a higher education institute, a scientific research body, or an individual or partnership of individuals.
      • Expenditure on consumables: This includes light, power, heat and materials used in the R&D process.
      • Externally provided workers: For example, workers supplied by an employment agency. 
      • Costs for software: You can claim for software licence fees for R&D and a reasonable share of the costs for software partly used in your R&D activities. Since April 2023, it’s also been possible to claim for cloud computing and data costs. 
      • Payments to volunteers in clinical trials: Most likely to apply if you’re in the pharmaceutical sector.

      You can’t claim for:

      • Production and distribution costs
      • Capital expenditure
      • Land costs
      • Rents and rates
      • Legal costs associated with patents and trademarks.

      What evidence do I need when claiming RDEC tax credits?

      As of August 2023, HMRC requires you to fill in an additional information form to support your claim. You will need to do this for each accounting period. Without this form, your RDEC claim will not be valid.

      To complete the form, you will need to provide the following details:

      • Your company details, including your company’s Unique Taxpayer Reference (UTR), employer PAYE reference number, your VAT registration number, and your business type.
      • Contact details of any agent engaged in your R&D claim or the primary R&D contact within your team.
      • Your accounting period start and end date.
      • Details of qualifying expenditure, outlining all of your eligible costs.
      • Details of qualifying indirect activities – these are activities that form part of a project but don’t directly contribute to resolving the scientific or technological uncertainty.
      • Details of all the projects you’re claiming for in the accounting period. How much detail you need to provide depends on the number of projects you’re claiming for. If you’re claiming for one to three projects, you’ll need to describe all the projects you’re claiming for that cover 100% of the qualifying expenditure. If you’re claiming for four or more projects, you’ll need to describe the lower of the following:
      • The number of projects that account for at least 50% of the qualifying expenditure. This must be at least three projects. 
      • 10 projects.
      • A description of each project, including the main field of science or technology the project relates to, what advance in that field the company hoped to achieve, the scientific or technological uncertainties faced by the company, and how the project sought to overcome these uncertainties.

      An example

      Let’s say your business has qualifying expenditure of £800,000. Below is an example of how you would calculate your RDEC benefit:

      £800,000 x 20% = £160,000

      £160,000 – corporation tax at 25% = £120,000.

      In this example, you’d receive a benefit of £120,000.

      RDEC calculator

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      RDEC for SMEs and larger companies

      The RDEC scheme is primarily aimed towards larger companies. That means those that employ more than 500 staff and have either a turnover of more than £100 million or more than £86 million in gross assets. 

      However, there are also circumstances in which SMEs can claim under RDEC. This includes if an SME has been subcontracted by a larger company or if the project has received grant funding. 

      In other cases, SMEs might be able to claim SME R&D tax relief instead. This allows companies to:

      • Deduct an extra 86% of their qualifying costs from their annual profit, in addition to the normal 100% deduction, giving a total deduction of 186%
      • Claim a tax credit if the business is loss making, worth up to 10% of the loss surrendered (the surrender rate).

      Be aware that the government plans to merge the SME scheme and the RDEC scheme into a single R&D tax relief scheme for R&D. This will apply to accounting periods starting on or after 1 April 2024 and will apply to all companies, regardless of their size. The aim is to help simplify R&D tax relief and make it easier for companies to claim.  

      As with the current RDEC scheme, the new scheme will offer an above-the-line credit worth 20% of qualifying expenditure. As this is subject to corporation tax, most profitable companies will receive a net benefit of 15% (if a company pays tax at the main rate of 25%). 

      For loss-making companies, the notional tax rate will be reduced to 19% under the new scheme.

      How do you receive your RDEC credit?

      There are seven steps that companies must follow to establish how they will receive their RDEC credit. These are as follows:

      1. Offset the RDEC credit against your company’s tax liability. If there is any credit left over, carry the balance to step 2.
      2. To ensure loss-making companies receive the same net benefit as profit-making companies, a ‘notional tax’ – ie corporation tax – needs to be applied. The notional tax is carried forward and allows you to reduce your corporation tax liability for a later accounting period.
      3. A cap applies to the payment of credit. This is based on the PAYE and NIC paid to HMRC relating to staff included in your RDEC claim. If the RDEC amount exceeds the cap, the difference is carried forward for use in later periods.
      4. Any amount remaining is then set against any outstanding corporation tax liabilities still owed from previous accounting periods.
      5. If the company is a member of a group, you can decide whether you want to surrender up to the credit amount available at this step to any other member of the group to offset against their tax liability. 
      6. Any amounts remaining at this point need to be offset by HMRC against other taxes if there are any outstanding.
      7. The final amount remaining is paid to you as a cash credit.

      How do I qualify for RDEC?

      To qualify for RDEC, you’ll need to be a large company. The definition of a large company for tax purposes in the UK is a company with:

      • More than 500 staff 
      • Either more than £100 million turnover or more than £86 million in gross assets. 

      You must also be eligible for corporation tax and the expenditure you want to claim must be revenue in nature. You can’t claim for costs of subcontracted-out R&D.

      SMEs might also be able to claim if R&D expenditure is subsidised or if an SME has been subcontracted by a large company. It also applies if State Aid has been applied for or received for the R&D project.

      How do I account for RDEC?

      You can claim for RDEC up to two years after the end of the accounting period it relates to. You’ll need to do this by entering the expenditure into your full company tax return form (CT600). As the credit is above-the-line, it will appear as other income in your accounts.

      How Swoop can help

      Getting to grips with business tax and tax credits can be challenging, which is why the team at Swoop is here to help you. We can help you work out whether you qualify for R&D tax relief, as well as help you make your RDEC claim. Speak with an RDEC expert today.

      Written by

      Rachel Wait

      Rachel has been writing about finance and consumer affairs for over a decade, helping people to get to grips with their finances and cut through the jargon. She's written for a range of websites and national newspapers including MoneySuperMarket, Money to the Masses, Forbes UK, and Mail on Sunday. Rachel has covered almost every financial topic, from car insurance and credit cards, to business bank accounts and mortgages.

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