R&D Tax Credits: Navigating the RDEC scheme

RDEC is part of the R&D Tax Credits scheme and supports large companies, businesses which have received grants and other kinds of state aid. Here’s what you need to know about the scheme.

When claiming R&D Tax Credits, there are two schemes that you need to be savvy about so you can maximise your funding available:

1) The SME scheme. SME R&D Tax Relief is typically more lucrative as the government wants to reward smaller companies (find out whether your company qualifies as an SME here).

2) The RDEC scheme (RDEC stands for Research and Development Expenditure Credit), which used to be the retired large company scheme. This series of posts will explore the RDEC scheme, so you are all clued up about how you should be claiming.

At GrantTree, we are adept at claiming under both the SME and RDEC schemes. We are also well-versed at advising you about the best way to position your company to maximise your claim, so if you have any questions, please get in touch!

What’s the difference between SME and RDEC schemes?

If your company falls into HMRC’s definition of a large company, or if you have received notified state aid, you will have to claim under the RDEC scheme. Small companies are companies which meet the following criteria:

  • Fewer than 500 employees, AND
  • A turnover less than €100 million OR a balance sheet less than €86 million

All other companies will fall under the RDEC initiative.

So, if your company has 499 employees and €101m turnover but has a balance sheet of €85m, then your company will be an SME and able to claim under the SME scheme. However if your company has 501 employees, or if both turnover and balance exceed the limits, it is automatically bumped into the RDEC scheme.

Once a large company has opted to claim under R&D Tax Credits RDEC for the first time, it has permanently elected into RDEC and cannot revert to the Large Company scheme.

SME companies, however, can continue to claim R&D Tax Credits under the SME scheme and in addition can claim RDEC on expenditure that does not attract SME relief (i.e. if the project received notified State Aid, mentioned in this article).

What expenditure can I claim for?

The process for identifying the qualifying expenditure for the RDEC scheme remains unchanged from the SME and large company scheme. The main difference is in how the relief is calculated (which I will get to in a moment).

The main differences in the RDEC scheme vs the retired large company scheme are that large companies who are operating in a loss may also claim (this was not the case before the RDEC scheme was implemented);
Commissioned subcontracted work cannot be claimed under the RDEC initiative (however, Externally Provided Workers can still be claimed);

The amount able to be recovered is slightly higher.

How do the calculations differ between the schemes?

In the SME scheme, the tax credit is obtained by artificially creating an additional “enhancement” to the R&D spend, and either deducting that from profit (thus reducing tax) or surrendering it in exchange for cash.

In the Large Company scheme, the same mechanism was used, but the enhancement was smaller (30% vs 130%); it is not possible to surrender the enhancement if the company was not profitable.

Both of those happen “below the line” – i.e. they are calculations that are applied to the entire company’s profit or loss, and do not impact the company’s P&L report, only its tax situation.

RDEC changes the game. Previously, it was known as “Above The Line”, or ATL. The reason is that the RDEC scheme operates “above the line” where profit and loss (and tax) is calculated, as it is intended to directly impact the expense calculations for the specific departments that do the R&D – thus incentivising R&D spend in large companies where, under the Large Company Scheme, R&D Tax Credits would otherwise have ended up too distant from the engineering teams to have any impact on them.

Originally, the RDEC credit amount was calculated as 10% of the company’s qualifying expenditure. It has changed since then, and companies can now claim up to 12%.

For more information on claiming R&D Tax Credits, either through the SME or RDEC schemes, please get in touch and a government funding expert will chat through your funding options with you.