Basics of RDEC (Research and Development Expenditure Credit Scheme)
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Much of what you’ll read online about R&D tax relief focuses on the SME R&D tax relief scheme, with advice about how to claim, what the benefits are and what kinds of companies can make a claim. This can mean it’s more difficult to find advice and guidance about the RDEC scheme. Here, we give you a basic starter for ten – what is the scheme, who can claim, and what are the main differences between the two schemes!
What is RDEC?
Just like the SME R&D tax relief scheme, the RDEC scheme is a UK Government tax incentive aimed at rewarding companies who undertake research and development, and was introduced in 2016 as a replacement for the Large Company R&D tax relief scheme. It is primarily designed for large companies, that is those with 500 employees or more, or that breach the limits of turnover and balance sheet assets.
As of 2018, the most recent year for which R&D stats are available, only 13% of claims for R&D tax relief were made through the RDEC scheme. However, these claims represented a whopping 48% of the value of total R&D tax relief, with the average RDEC claimant receiving over £300,000 in tax benefit. Even for larger companies, that saving is not to be sniffed at!
How does RDEC work?
RDEC is a pretty straightforward tax relief, especially when compared to the SME scheme. Basically:
- The RDEC tax credit is equal to 20% of a company’s eligible R&D expenditure (13% to 31st March 2023)
- The credit is taxable at the Corporation tax rate, so the overall tax benefit is equal to 15-16.2% of qualifying expenditure, depending on the tax rate
- The credit can be shown ‘above the line’, so is visible as income in the claimant’s accounts
As for the qualifying expenditure, there are a couple of key differences. Just like in the SME scheme, under the RDEC scheme a company can claim for:
- Staff costs, including pensions and bonuses
- Externally provided worker costs
- Utilities costs
- Software costs
- Raw materials costs
- Payments to clinical trial volunteers
However, the rules for subcontractor payments and independent research are very different:
- For subcontractors, only payments made to certain qualifying bodies, individuals or partnerships of individuals can be included in the claim. Payments to any other type of subcontractor, including limited companies, are not allowable.
- Large companies can also include contributions to independent research, as long as they are made to qualifying bodies, individuals or partnerships of individuals can be included in the claim.
Can SMEs claim RDEC?
In two very specific situations, yes! SMEs can claim RDEC if:
- They have received grant funding for their R&D. In this situation, some or all of the costs will have to be routed through RDEC, depending on the type of grant received.
- They have carried out subcontracted R&D on behalf of a Large Company. In this situation, all of the costs of the subcontracted projects have to be routed through RDEC.
The main thing to remember when claiming RDEC relief for an SME is that you must comply with the rules of the RDEC scheme by excluding certain types of subcontractor costs.
How will my client receive their credit?
Once a company has calculated its eligible expenditure, there are seven steps to claiming the tax benefit. The detail of these can be found in CTA 2009 Chapter 6A s.104N and 104O and CIRD89780. In brief, the claimant company must:
- Discharge any corporation tax liability for the accounting period.
- Adjust to reduce net of tax amount
- Restrict to PAYE/NIC of R&D staff
- Discharge any corporation tax liability for other accounting periods
- Surrender for group relief
- Offset against any other tax liabilities
- Remaining balance paid to the company
Can I use WhisperClaims to prepare RDEC claims?
Yes! The system has been designed to prepare claims for both schemes, and combined claims where some of the costs go through RDEC and the rest through the SME scheme. There is also a section that helps you assess whether your client is an SME for R&D tax purposes, ensuring that all claims and companies are routed correctly.