Date Published:
March 14, 2023
Here we look at the research and development expenditure credit (RDEC) scheme.
The research and development expenditure credit (RDEC) is aimed at large companies, broadly defined as those with a turnover of more than £200 million a year or more than 500 employees or profits of more than £250,000 a year.
The government wants to encourage and reward innovation across the UK economy and accordingly provides tax credits for companies that are engaged in R&D work.
The Department for Business, Energy and Industrial Strategy published guidelines for the RDEC incentive. It says:
If you are solving problems that your business is facing or dealing with a challenge that doesn’t have an obvious solution in a new way then you are likely to be undertaking R&D. Expenditure on developing new products, processes or services or adding to existing knowledge could well qualify for RDEC.
Salaries, national insurance contributions and employer’s pension contributions can be claimed for staff engaged in R&D; however, the claim can only relate to the time and resources the staff member devotes to R&D work.
Payments to employment agencies that are unconnected companies (those that are independent of the contracting firm) can be claimed for at a maximum of 65%.
In the case of subcontractors, only payments to charities, individuals, higher education institutes, scientific research institutes, health service bodies or partnerships will be eligible.
Consumables such as electricity and water that contribute to R&D can be claimed as can materials used in trials and for constructing prototypes.
Payments to volunteers in trials are claimable – this is usually only relevant to pharmaceutical companies.
General business expenditure, for example, rent and the production cost of goods, will not be eligible. Capital expenditure is also not claimable.
Loss-making companies can also apply for RDEC. The scheme is intended to support risk-taking and innovation therefore as a matter of policy failed projects are not excluded.
Companies in any sector can apply. Although RDEC is aimed at large companies, SMEs can claim in limited circumstances if:
Changes to the regime take effect on 1 April 2023. The most important of which is an increase in the credit rate to 20% from 13% on qualifying expenditure.
This means that a company that had a claim value of, for example, £100,000 can claim a gross credit amount of £120,000 rather than £113,000.
However, it would lose out on the increase to large company corporation tax from 19% to 25% also due to take effect on 1 April.
Thus its tax credit would be £90,000 (£120,000 less 25% corporation tax) rather than £91,530 (£113,000 minus 19% corporation tax).
The tax credit would be applied to the company’s corporation tax bill.
The claim is made using the corporation tax for company tax return form (CT600). It is advisable to include a methodology with the claim and explain the criteria used to assess what activities were R&D work. Your claim is made up of the qualifying expenditure plus 20% (from 1 April 2023, 13% before). The claim is capped by HMRC at the company’s liability for R&D PAYE and national insurance.
Claiming RDEC does not stop a company also claiming research and development capital allowances (known as RDAs) but it cannot make a claim under both schemes for the same cost or expenditure.
Once a claim has been submitted, HMRC typically takes four to six weeks to process it, with payment following about two weeks later.
A successful RDEC claim can make a significant difference to a balance sheet and expert professional assistance is vital to maximising the size of it, especially for companies that are new to R&D work.
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To find out if your project or innovation qualifies under the R&D SME scheme and how it can help your business, get in touch for a Free, No Obligation Evaluation. Start claiming R&D Tax Credits today.
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