The main things you need to know about the Research and Development expenditure credit (RDEC) – what it is, who is eligible, and the benefits of applying.
The Research and Development expenditure credit – or ‘RDEC’ – is a UK government incentive that rewards companies for investing in innovation. It does this by providing eligible companies with an above-the-line credit worth up to 16.2p for every £1 they invest in wages, prototypes, and other forms of qualifying expenditure. In the 2021-2022 tax year, the average RDEC claim was worth £253,000.
Launched in 2013, RDEC is one of three schemes that make up R&D Tax Relief. The other two are SME R&D Tax Relief and the enhanced R&D intensive support scheme (ERIS). Here’s the key differences between the three schemes:
- RDEC supports larger businesses, as well as SMEs that are ineligible for the SME or ERIS schemes
- SME scheme supports most small and medium-sized businesses
- ERIS offers additional funding to highly innovative SMEs that are unprofitable. It only applies to costs incurred on or after 1 April 2023.
Note: the government has combined RDEC and SME R&D Tax Relief into the new merged scheme. The merged scheme will apply to accounting periods starting on or after 1 April 2024.
What is the RDEC rate?
The RDEC rate is currently 20%. This rate applies to costs incurred on or after 1 April 2023.
This means you can apply for a credit worth 20p for every £1 you invested in qualifying expenditure.
After tax, RDEC is worth 15% for most companies and up to 16.2% for companies paying the small profits corporation tax rate of 19%.
The RDEC rate for expenditures made before 1 April 2023 is 13%. It is 10.5% after tax (profitable companies) or the notional tax rate (unprofitable companies).
Benefits of RDEC for larger businesses
The main benefit of claiming RDEC is that it can provide you with a tax reduction or cash credit worth up to 16.2% of your investment in qualifying R&D expenditure. This makes investing in R&D more lucrative and lessens the financial risk of failure. A project doesn’t need to succeed to qualify for relief.
RDEC provides an above-the-line credit, meaning it is accounted for in your P&L before interest and taxation (EBIT). As a result, RDEC has a visible impact on your company’s income, helping relevant stakeholders, such as R&D budget setters, to more easily see the positive impact development work has on the company’s financial position and long-term success.
Changes to RDEC in 2024
The government is combining RDEC and SME R&D Tax Relief into a merged scheme that will impact claims for accountancy periods starting on or after 1 April 2023.
The merged scheme will closely mirror the current RDEC regime, offering an above-the-line credit worth 20% of qualifying expenditure.
You can read more about the new, merged scheme here.
If you are looking to claim RDEC for work conducted for an accounting period starting before 1 April 2023, there are several important changes you need to be aware of:
- The RDEC rate increased from 13% to 20% for expenditures made on or after 1 April 2023
- All companies must now file an additional information form alongside their claim, which asks companies for a range of financial and technical information about their development work
- Costs related to cloud computing and data licensing are now eligible for relief
- Conducting pure mathematics now counts as a qualifying R&D activity
Now, let’s look at each of these changes in more detail.
Increase to the RDEC rate
For starters, the RDEC rate has risen from 13% to 20% on expenditures made on or after 1 April 2023.
As mentioned, RDEC is subject to corporation tax. After tax, RDEC is worth between 15p and 16.2p of every £1 you invest in qualifying R&D, depending on your corporation tax rate.
| Original RDEC Relief rate | Original RDEC Rate After Tax | New RDEC Relief Rate | New RDEC Rate After Tax |
|---|---|---|---|
|
13% |
10.5% |
20% |
16.2% to 15% |
New claim requirements
All RDEC claims submitted after 8 August 2023 must include an additional information form containing the following:
- The answers to five technical questions about your projects
- Your project costs broken down into nine categories of qualifying expenditure
- Other company information, including who is responsible for preparing your claim and the names of any external providers you used
Unlike companies applying for SME R&D Tax Relief, RDEC applicants have always had to submit financial and information about their projects to access relief. However, the new requirements are far more prescriptive about what information companies need to provide, leaving less room for error and increasing the likelihood of a claim being non-compliant.
The new requirements are designed to help HMRC tackle non-compliance, which in the 2020 financial year cost £1.3 billion. In September, the tax agency announced that, between 8 August and 3 September, nearly half of the R&D Tax applications it received did not include the additional information form, meaning they were immediately rejected.
Cloud, data, and pure mathematics become eligible for relief
In more positive news, certain costs relating to cloud computing and data licensing incurred in accounting periods starting on or after 1 April 2023 are now eligible for relief.
The Department for Science, Innovation and Technology has also updated the definition of research and development for tax purposes to include pure mathematics as a qualifying activity.
This means that you’ll be able to claim relief on activities related to performing pure mathematics, so long as the work contributed to resolving a scientific or technological uncertainty.
Both updates are designed to ensure the R&D Tax Relief scheme keeps pace with the modern nature of development work.
Who can claim RDEC?
To qualify for the RDEC scheme, you need to be a UK-registered business that’s liable for UK corporation tax.
You also need to have conducted one or more qualifying projects. A project is a collection of activities performed to overcome a technical or scientific uncertainty in order to achieve a technical or scientific advance.
An uncertainty is a point in your development work where you do not know how to proceed – there was ‘uncertainty’ – meaning you have to experiment.
A technological or scientific advance is something that extends your company’s scientific or technical understanding beyond what you already knew or were able to ascertain from public sources, such as online journals.
You also need to have spent money on qualifying costs like salaries, contributions to independent research, and consumables like raw materials and utilities.
Head here for a complete list of the costs you can claim relief on.
If you are unsure whether your company and projects qualify for the RDEC scheme, our specialists would be happy to advise you. Just get in touch, and we’ll be happy to provide a free consultation on your eligibility.
The question then is, do you also qualify for SME R&D Tax Relief or ERIS? For most businesses, the SME and ERIS schemes are more generous than RDEC. So, if you’re eligible for one of these two schemes, you should apply for them instead.
Are you eligible for the SME or ERIS schemes? Here’s what you need to consider.
1. You must be an SME
You need to be a small or medium-sized business to apply for SME R&D Tax Relief or the ERIS scheme.
For the purposes of R&D Tax Relief, an SME is a company with:
- Fewer than 500 employees
- And a turnover of less than €100 million
- Or a balance sheet worth less than €86 million
Things like team members on maternity leave and part-time workers can make the staff element of this calculation harder to work out.
For more information, check out our blog on whether you qualify as an SME or a large company.
And yes, the values are in Euros. They were set by the European Commission when the UK was still part of the EU, and the British government hasn’t updated them post-Brexit.
2. Project funding and state aid
Size isn’t the only thing you have to consider when working out whether to apply for RDEC or the SME scheme. You also need to look at how you funded your projects.
SME R&D Tax Relief is a type of notified state aid, which means a government subsidy generous enough that the European Commission, which regulates public funding across the European Union, needs to be notified. Under subsidy control laws, companies can’t receive more than one type of notified state aid for the same R&D project.
So, if you have financed your development work with certain other types of government funding – an innovation grant, for example – you may need to apply for R&D Tax Relief for that work under the RDEC scheme. This is because RDEC is not a type of notified state aid.
Under the old rates – those applying to investments before 1 April 2023 – claiming under RDEC rather than the SME scheme meant losing out on a large amount of R&D Tax Relief.
However, now that the RDEC rate has risen and SME R&D Tax Relief has decreased, grant-winners and other affected companies will lose much less funding, a real win for highly innovative businesses.
Additionally, once the merged scheme comes into effect, government guidance suggests that grant funding will have no impact on a company’s R&D Tax Relief claim.
Read more about grants, R&D Tax Relief and state aid rules.
3. Subcontracted R&D
The R&D Tax Relief scheme has strict rules over who can and cannot claim relief on subcontracted R&D and how the companies involved must claim.
In brief, they are:
- An SME cannot claim R&D Tax Relief on work it was subcontracted to perform by another SME
- Large companies cannot claim R&D Tax Relief on work subcontracted to another registered business but can if the work was performed by a university, charity, or several other types of organisation
- SMEs can claim R&D Tax Relief on eligible work they were subcontracted to perform by a large company, but they must claim under the RDEC scheme
4. Connections to other companies
If you have significant connections to other companies through your shareholdings, you may be considered a linked or partner enterprise. In this case, you may need to include some or all of the finances and headcounts of the companies you are linked and partnered to in the company size test. Which could affect whether you qualify as an SME or a large company.
Linked enterprises
Your company is considered a ‘linked enterprise’ if another business:
- Owns more than 50% of your company’s voting rights
- Can appoint or remove a majority of your management team
- Can exert a “dominant influence” over your company
If your company is linked to another, you must include the personnel and finances of the linked businesses – plus those of any other firms that the business is linked to – when you take the company size test.
Partner enterprises
Partner enterprises own 25% to 50% of another business. A big share but not a controlling stake.
If you are partnered with another company, you have to add a percentage of its staff, turnover and balance sheet to your own when performing the company size test.
How much you add depends on how large a share your partner owns of your business. If your partner owns 25% of your company’s shares, you’ll add a quarter of its staff and assets.
Thankfully, investment corporations such as venture capital firms are not counted as partners.
Exceptions
Thankfully, there are many types of organisations that can own up to 50% of your shares without being considered a linked or partner enterprise.
They include venture capital firms, universities, and institutional investors. Check out the full list of exempt firms.
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How to claim RDEC in 2024
Every RDEC application differs based on variables like the number of projects you’re claiming for and your collection of eligible costs. However, generally speaking, the claims process has four parts.
Part 1: Select qualifying projects
Here, you’ll want to understand which of your projects qualify for the Research & Development expenditure credit.
Part 2: Corresponding activities and costs
Then, you’ll want to identify all the qualifying direct and indirect activities that make up these projects.
Then, you need to scour your records for all the qualifying expenditures – staff time, raw material costs, and so on – that relate to these activities.
Each cost will need to be accurately apportioned based on how much of it can be attributed back to a qualifying activity and what percentage of each cost is eligible for relief under RDEC.
Part 3: Prepare the additional information form
As of 8 August, all companies claiming R&D Tax Relief must submit an additional information form containing a range of financial and technical data about your projects, as well as a few specifics about your company.
Part 4: Perform the seven-step RDEC treatment and update your CT600
Finally, perform the seven-step treatment outlined below and then update your CT600 with your calculations.
RDEC 7 steps
You will receive your Research and Development expenditure credit as some combination of:
- A reduction in your corporation tax liability
- A cash credit
- An offset against future corporation tax liabilities
There are seven steps to working out what form your relief will take, which you need to perform as part of the submission process.
Step 1: Discharge corporation tax liabilities for the accounting period
First, HMRC will use your Research and Development expenditure credit to pay off any outstanding corporation tax you owe for the accounting you’re claiming for. This includes, if your company is profitable, the tax owed on your credit.
Step 2: Apply the notional tax rate
In step 2, HMRC applies a notional tax of 25% – the main rate of corporation tax from 1 April 2023 – to the credit claimed by unprofitable companies. Unprofitable companies do not pay corporation tax, so this step ensures that profitable and loss-making companies receive the same level of relief.
Here’s how it works. If, after step 1, your credit is worth more than your gross credit minus the edit, HMRC will retain the difference. You can carry this retained tax forward and offset it against future corporation tax payments when your company is profitable.
Step 3: Account for the PAYE/NIC Cap
The size of RDEC credit you can claim is capped based on the size of your company’s PAYE/NIC liability in the financial year you’re claiming for. This is different from the PAYE/NIC cap that affects SME claims.
You can carry the amount you forfeit into future accounting periods, assuming your PAYE bill is sufficient for HMRC to release your funds. You will not have to pay corporation tax or apply the notional tax rate on this amount a second time.
Step 4: Offset other corporation tax liabilities
Next, you need to use your credit to settle (or ‘discharge’) any outstanding tax liabilities from any other accounting period.
Step 5: Surrender to your group
If you choose, you can then surrender all or some of the credit left over from Step 4 to other organisations in your group.
Step 6: Pay off other liabilities
You can then use the remainder from Step 6 to pay off other liabilities, such as VAT.
Step 7: Receive a credit
You’ll receive any amount remaining as a cash credit.
Accounting for RDEC
Your Research and Development expenditure credit should be treated as taxable income and recorded above the line in your P&L.
RDEC was designed as an above-the-line credit to make it easier for companies to understand the benefit of their research and development work and for development teams to make the case for further investment in R&D.
Double-entry accounting for RDEC relief
Your Research and Development expenditure credit should be treated as taxable income and recorded above the line in your P&L.
RDEC was designed as an above-the-line credit to make it easier for companies to understand the benefit of their research and development work and for development teams to make the case for further investment in R&D.
| Debit | Credit | |
|---|---|---|
|
Balance Sheet |
Corporation Tax |
- |
|
P&L (Income) Statement |
Corporation Tax charge |
Other Income |
And here’s how you might post it if you received it as a cash credit.
| Debit | Credit | |
|---|---|---|
|
Balance Sheet |
Bank |
Corporation Tax charge |
If you capitalise your R&D costs, the treatment will be different.
Expert support on your RDEC claim
If you have any questions about the RDEC scheme, such as whether you’re eligible and how much relief you should file for, GrantTree’s R&D Tax Relief experts are here to help.
Over the last 14 years, our R&D Tax team has secured over £400 million for more than 2,000 innovative UK companies. They are perfectly placed to help you leverage this generous but complex scheme and navigate the new requirements to make sure your claim is compliant.
To ask our team a question or learn more about our R&D Tax Relief service, just get in touch.
