Page written by Rachel Wait. Last reviewed on September 25, 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).
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.
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.
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.
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.
There are certain types of expenditure that can be claimed under RDEC. These include:
You can’t claim for:
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:
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.
Try our RDEC calculator today and find out how much capital your business can receive under the program.
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This calculator and the figures displayed are for illustrative purposes only. Actual eligible claim amounts may differ depending on a number of factors.
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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:
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.
There are seven steps that companies must follow to establish how they will receive their RDEC credit. These are as follows:
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:
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.
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.
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 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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