Here’s what the upcoming R&D expenditure credit (RDEC) increase means for your next R&D Tax Relief claim.
On 17 November, the government announced it was increasing the Research and Development Expenditure Credit (RDEC) rate from 13% to 20%.
As an above-the-line credit, RDEC is subject to corporation tax.
After tax, and taking account of the planned increase in the corporation tax rate from 19% to 25%, RDEC will reward companies with 15p worth of relief for every £1 they invest in qualifying expenditure, up from 10.5p.
| Original RDEC Relief Rate | Original RDEC Rate After Tax | New RDEC Relief Rate | New RDEC Rate After Tax |
|---|---|---|---|
|
13% |
10.53% |
20% |
15% - 16.2% |
The new rate will apply to investments made on or after 1 April 2023.
This blog explains how the increase in the RDEC rate will affect your claim. And what you need to do to maximise the new, higher rate of relief.
How will the RDEC rise affect my claim?
The increase in the relief rate has three main consequences for companies claiming RDEC:
- Later expenditure will generate more relief
- Grant-winning and state-funded SMEs receive much more relief
- The incentive to maximise your claim is even greater
Let’s look at each of these consequences in greater detail.
Later expenditure will generate more relief
Qualifying expenditure that takes place on or after 1 April 2023 will receive 42% more relief than investments made beforehand.
As a result, companies are likely to postpone non-critical investments in things like staff costs, raw materials, and consumables until this date.
At the same time, we are strongly advising companies not to exploit this change by engaging in any kind of questionable behaviour. Asking suppliers to postpone invoices, for example.
Doing this could easily land you with a lengthy HMRC compliance check, also known as an enquiry. Or worse.
Grant-winning and state-funded SMEs receive much more relief
The RDEC increase is especially beneficial for small and medium-sized enterprises, as defined by the company size test, that have won an innovation grant or received another form of state funding for their development work.
Under state aid rules, companies cannot claim SME R&D Tax Relief for projects that have been funded with notified state aid. Even companies that would otherwise qualify as an SME.
As the SME scheme is currently much more generous than RDEC, receiving a grant would cause businesses to sacrifice a large proportion of their R&D Tax Relief windfall.
However, with RDEC becoming more generous and SME R&D Tax Relief falling, grant-winning SMEs will receive more relief overall and will be required to sacrifice less of their R&D Tax Relief by accepting the grant.
Indeed, because of a curious effect we call the valley of death, companies that are breaking even will actually receive more R&D Tax Relief through the RDEC scheme than the SME scheme.
Example
We can illustrate the affect on grant-winning SMEs with an example.
Let’s say you are a profitable SME that’s invested £1,000,000 in Project A, all of which is qualifying expenditure.
Here’s how receiving another form of state aid, which precludes you from claiming SME R&D Tax Relief, would impact your claim given the current relief rates.
| No State Aid (SME R&D Tax Relief) | With State Aid (RDEC Relief) | Difference |
|---|---|---|
|
£247,000 |
£105,000 |
-£142,000 |
If you received state aid for Project A, you sacrifice £142,000 of R&D Tax Relief.
So, clearly, you would need to obtain a grant worth more than that amount to make it worth your while.
Now, let’s look at this situation taking into account the higher RDEC rate and lower SME R&D Tax Relief rate.
| No State Aid (SME R&D Tax Relief) | With State Aid (RDEC Relief) | Difference |
|---|---|---|
|
£215,000 |
£150,000 |
-£65,000 |
As you can see, receiving a grant or other kind of funding means you have to give up much less R&D Tax Relief.
This makes innovation grants, as well as other forms of state aid, far more valuable and enticing for innovative SMEs.
If you would like to explore your eligibility for innovation grant funding, GrantTree’s experts can give you a free, no-hassle assessment of your options. Just get in touch.
The incentive to maximise your claim is even greater
With the RDEC rate increasing, the incentive to claim your full entitlement of relief has never been greater.
Every extra pound of eligible expenditure will gain your business almost 50% more relief.
Unfortunately, many companies miss out on their full entitlement because they neglect to include all of their qualifying costs in their claim.
This generally happens because businesses and their advisors do not realise that certain costs qualify or aspects of their development work qualify for relief.
However, with HMRC policing R&D Tax Relief claims much more thoroughly, companies must combine efforts to maximise their claim size with an ironclad dedication to compliance.
Enquiries are rising, the Fraud Investigation Service is on the lookout for claims, and HMRC has instituted a range of new measures designed to intercept errors and fraud.
All this means that inaccuracies and dubious expenditures are far more likely to result in a lengthy compliance check that could delay your tax relief by several months.
Or, potentially, several years.
Maximise your claim with GrantTree
If you want to take advantage of the new, higher rates of RDEC relief while minimising your chances of an HMRC enquiry, GrantTree is here to help.
Using our 12 years of experience filing successful R&D Tax Relief claims, we can help you identify development work and expenditure that non-specialist accountancies and consultants often miss.
Also, unlike many providers, we’ve invested heavily in technical expertise, meaning we can prepare a watertight technical report that will justify your claim’s eligibility to HMRC’s tax inspectors.
We’ll handle your claim preparation process from start to finish, saving you time while giving you peace of mind that your submission and your company’s reputation are in good hands.
To find out more about getting expert support from GrantTree’s R&D Tax Relief experts, just get in touch.
