Research & Development Expenditure Credit (RDEC) Explained
What is RDEC Tax Credit?
The RDEC scheme is a tax credit which can be claimed by either a large company or a small/medium-sized enterprise that does not qualify for the SME scheme.
Whether your business makes a profit or loss, some or all of the R&D expenditure credit may be used to settle your company’s Corporation Tax liabilities or those of another company within the same Group, or can be received as a cash credit.
How is the RDEC scheme changing in 2024?
From April 1 2024, the RDEC and SME schemes will be merged.
This will have a significant impact on companies claiming R&D tax credits.
Key changes include:
- One single rate and set of rules: a 20% post-tax rate between 14.7%-16.2%
- Qualifying rules for subcontracted and subsidised R&D (previously RDEC exclusive)
- Restrictions on overseas R&D expenditure
The exception will be for SMEs that are classed as R&D intensive, i.e. more than 30% of their total expenditure is on research and development. They will qualify for a more beneficial rate of relief.
Who can claim RDEC tax credits?
Large companies
These are defined as companies which have more than 500 staff and a turnover of more than 100 million euros or a balance sheet total over 86 million euros.
R&D tax relief supports companies that work on innovative projects in science and technology, but you cannot claim under the RDEC scheme if the attempted advancement is in the arts, humanities or social sciences, including economics.
Recipients of notified state aid
If an SME has received government grant funding, it will need to claim R&D tax credits through the RDEC scheme.
Notified state aid is government funding, e.g. through the Innovate UK agency, that is now approved by the subsidy control regime, which came into force at the start of 2023 to replace European Commission legislation following the Brexit transition.
Subcontracted R&D
If an SME has been subcontracted to conduct research and development work, it will need to claim tax relief through the RDEC scheme.
This ensures there is no excessive subsidisation of the same R&D projects by multiple companies because the contracting company can also claim R&D tax credits for the work carried out.
Partner & Linked Enterprises
If your business has close connections to other companies, it could be categorised as a linked or partner enterprise and may therefore be eligible to make an RDEC claim.
A linked enterprise is one where another business can control your company, by owning more than 50% of your company’s voting rights and having the power to appoint or remove a majority of your management team.
A partner enterprise is where one company owns between 25% and 50% of another smaller business, i.e. less than a majority share, with the assets, balance sheets and employee counts aggregated proportionately in line with the shareholding of the bigger company.
In both cases – partner and linked enterprises – it could mean a company crosses the threshold whereby it becomes eligible for the RDEC scheme rather than the SME scheme when applying for R&D tax credits.
What can be claimed under the RDEC scheme?
It’s a good idea to familiarise yourself with the correct areas of your business expenditure for which you can claim R&D tax relief.
Consumables
These include the cost of fuel, materials, light, heat and water used in the R&D process.
Materials must be used in a certain way so they are no longer fit for their original purpose, or they have been consumed as part of a functioning prototype for the R&D purpose.
However, money spent on fixed assets such as land, buildings, machinery and equipment are excluded from the qualifying RDEC scheme criteria.
Contributions for independent R&D
This applies only to the RDEC tax credit scheme, not SMEs.
By this term, we mean financial contributions that are made to bodies that carry out independent research and fit the criteria according to government legislation, e.g. charities, universities, research organisations or health services.
They cannot be connected to, or subcontracted by, your company. The research must also be relevant to your industry.
Employee costs
Staff wages/salaries, Class 1 National Insurance contributions and pension fund contributions can all be included in an RDEC claim, provided those personnel have been directly involved in the R&D activity.
An allowance exists for travel and sustenance expenses incurred on work duty by the staff who qualify, provided they have been paid for by the employee and repaid by the business rather than the company directly.
But shareholder dividend payouts and the costs of recruitment and referrals, including of R&D staff, are ineligible.
Clinical trial volunteers
You can claim an RDEC tax credit by submitting details of payments made to volunteers who have taken part in any clinical trials for pharmaceutical research. This includes trialling drugs both on those subjects who are healthy and those with the relevant condition or disease.
Data licensing and cloud computing
This is one of the newer areas to be included under R&D RDEC claims, because from April 2023 licence payments for datasets and data analytics became part of the RDEC tax credit scheme qualifying expenditure, as did cloud computing services.
You can only claim if you have used the data for research purposes, while you can claim an appropriate proportion for licences or cloud computing services that are only partly used for R&D activity.
HMRC defines a data licence as “a licence to access and use a collection of digital data”, while included in cloud computing are data storage, hardware facilities, operating systems and software platforms.
Software
Costs for computer software licences that are used for carrying out R&D activity can be included in a claim. If the software has only been partly used for R&D work, you can claim an appropriate proportion of the costs as research and development expenditure credit.
Subcontracting costs
Payments made to subcontractors and external workers can be included in an RDEC claim, depending on the nature of the subcontractor agreement and what they have contributed to the R&D activity.
Initial recruitment costs for external workers are not covered, but 65% of wage expenditure paid to the staff provider or staff controller is potentially eligible to be claimed (provided those persons are not connected to your company).
If the external worker does not work full-time on R&D activity, you can claim an appropriate proportion of their costs as RDEC tax credit.
Subcontractors must carry out the work themselves, as opposed to subcontracting again to a third party.
What cannot be claimed as RDEC tax credits?
Notable exclusions from the RDEC scheme’s qualifying criteria are:
- Money spent on fixed assets such as land and buildings
- Costs of machinery and equipment used in production
- Distribution costs
- IT costs incurred for day-to-day business requirements
- Meal and travel expenses paid directly by the company
- Shareholder dividend payouts
- Creation of patents and trademarks
What are the RDEC tax credit rates?
In the years leading up to 2023, the UK government made incremental steps to raise the RDEC rate before a much more significant increase which took effect on expenditure incurred from April 1 2023.
The expenditure credit, calculated as a percentage of your qualifying R&D expenditure, incurred from April 1 2023 was raised to 20% from 13% prior to that date.
However, retrospective RDEC scheme claims can be made for the previous two years, so the 13% rate will still apply for any claims made which incorporate work that was carried out through to March 31 2023.
From April 1 2024, the RDEC and SME schemes will be merged, which means there will be a single rate and set of rules: 20% post-tax rate between 14.7%-16.2%.
How to claim RDEC tax credits
If this is your first time claiming RDEC tax credit, where to begin? The initial step is to identify whether your company is eligible and the types of R&D expenditure which can be claimed for, both of which are explained in full above.
As each research and development expenditure credit claim comprises a retrospective look at the work carried out, you will need to provide a detailed recollection of the R&D projects your business has completed.
If there is anything you are unsure about, do not hesitate to contact us by calling 01332 409711 or emailing [email protected]
What to do before claiming RDEC tax credits
Sometimes, clients have difficulty remembering dates of when particular activities occurred, so we advise you to refresh your memory of important aspects such as the initial trial-and-error, when the first uncertainty happened, what that comprised and who was involved in the project.
You will also need clear records that can be accessed which break down specific costings. These costs include payroll for any permanent staff included in the R&D and subcontractor invoices, specifically from the dates in question, retrospective across the maximum last two accounting periods.
Also important is a concise idea of any wasted materials encountered or prototypes you spent money on, plus access to utility bill records.
How to calculate RDEC credit expenditure
Large companies covered by the RDEC scheme can calculate their R&D tax credit relief at a rate of 20% of the company’s qualifying expenditure.
Here’s a guide to working out your R&D tax credits calculation under the RDEC scheme:
- Work out the costs that are directly attributable to R&D
- Reduce any relevant subcontractor or external staff provider payments to 65% of the original cost
- Add all costs together
- Multiply the figure by the expenditure credit rate of 20% to get the expenditure credit
You can also make use of our R&D tax credits calculator. However, as simple as that may sound, it is much easier said than done to ensure exactly the right extent of qualifying expenditure is included within a claim, and that it is all submitted correctly.
That is where randd are best placed to assist you.
How randd can help
In contrast to the vast majority of accountancy practices, we have the resources to dedicate a specialist team to handling your RDEC tax credit claim, putting in the countless hours of research required to ensure no stone is left unturned in building a case that will guarantee you receive the maximum value possible.
With expertise accrued over more than 15 years in this industry, we are ideally positioned to identify and include every eligible activity – and we have successfully claimed back millions of pounds through our simplified, efficient procedure.
By working with you, we will produce a detailed technical report – the key document explaining which R&D activities were undertaken, the scientific or technical challenges the R&D helped to solve and how the activity meets the current legislation.
We maintain a 100% claim success rate and we have a proven track record of claiming back up to NINE times more R&D tax relief than an accountant, alternative agent or a self-submission claim would.
If you would like to enlist randd’s help with making an R&D tax credits claim, call 01332 409711 or email [email protected]
RDEC scheme FAQs
The RDEC scheme allows companies to receive additional funding for R&D activities and can help organisations become more competitive in the market through cash injections. It also allows for investment in innovative projects that could ultimately boost long-term success.
Further advantages of claiming through the RDEC scheme include large sums of money being received for each eligible project, while submitting a successful claim can reduce a company’s tax liability, improve cashflow and boost innovation.
At randd, we categorise companies into 15 distinct sectors, with Manufacturing & Engineering, Software & IT and Security & Electrical among the most prolific for RDEC scheme claims.
SMEs undertaking qualifying R&D for large companies may claim under the RDEC scheme.
- Identify accounting periods
- Discharge any liability to Corporation Tax
- Identify eligible projects
- Calculate R&D tax benefits
- Complete the CT600 form
If you are unsure about any of these steps, contact us
HMRC may request further information to support an RDEC claim. Get in touch with us to find out more.
The RDEC scheme returns 20% gross and 15% net of your qualifying R&D expenditure, with no upper limit to the amount.
The entire process can take up to 100 days, but most cases are completed sooner.
R&D Tax Credits are paid as a cash credit, a reduction in your Corporation Tax liability or as a rebate on tax you have already paid.
You can make a claim each year. As well as the latest financial year, you can also claim retrospectively for the previous two years. For example, if the end date of your accounting period each year is March 31, you would need to submit your R&D tax credit claim for the accounting period April 1 2023 to March 31 2024 before midnight on March 31 2026.