The research and development expenditure credit (RDEC) tax relief scheme is available to large companies with accounting periods beginning before 1 April 2024.
For R&D tax purposes, a company is large if it has more than 500 employees or both turnover exceeding € million and gross assets exceeding €86 million. The consolidated worldwide group is considered in determining the size, as well as considering any linked or partner enterprises which are the subject of more detailed rules. Companies which exceed these thresholds cannot claim under the Small and Medium Sized Enterprise (SME) scheme.
A company which is not large based on the above criteria, which would ordinarily claim under the SME scheme, may need to claim under the RDEC scheme in full or in part if its qualifying R&D expenditure has been wholly or partly subsidised (eg by a grant, a subsidy, or customer contributions), or where its R&D activities are contracted out to it by another entity.
For accounting periods beginning on or after 1 April 2024, the SME and RDEC schemes have been blended to create the merged scheme. R&D intensive SMEs continue to enjoy enhanced support through the enhanced R&D intensive support (ERIS) scheme. Please see our other factsheets linked here for detail of these schemes.
RDEC – the tax benefit
Under the RDEC scheme, eligible companies receive tax relief in the form of a tax credit. Unlike the SME scheme, the RDEC credit is accounted for ‘above the line’ for accounting purposes, therefore increasing a company’s profit before tax. The credit is taxable.
The gross credit available on qualifying R&D expenditure prior to 1 April 2023 is 13%. For expenditure incurred from 1 April 2023, this increased to 20%.
As an example, assuming qualifying expenditure of £100,000, relief under the RDEC scheme would give a gross credit available of £13,000, prior to 1 April 2023. Due to the credit being taxable, assuming a corporation tax rate of 19%, the benefit to the company is £10,530 (calculated as the £13,000 credit less tax at 19% of £2,470). As such, the effective tax benefit the company could receive is 10.53% of its qualifying expenditure.
For expenditure incurred post 1 April 2023, assuming qualifying expenditure of £100,000, the gross credit available would be £20,000. Assuming a corporation tax rate of 25%, the actual benefit the company receives would be £15,000 (calculates as the £20,000 credit less tax at 25% of £5,000). As such, the effective tax benefit to the company is 15% of its qualifying expenditure. This increases to 16.2% of qualifying expenditure if the company falls under the small profits tax rate of 19%.
There are however seven steps that are applied to determine how the credit is relieved:
- The gross credit is used to discharge the company’s corporation tax liability for the accounting period to which the R&D claim relates.
- Any credit remaining after step 1 is compared with the net expenditure credit (gross credit less applicable corporation tax). Any excess over the net expenditure credit is withheld and may be group relieved or carried forward to future periods. The balance is carried forward to step 3.
- The amount brought forward from step 2 may be capped, based on the company’s total PAYE and National Insurance contributions (NICs) related to R&D-engaged workers. Any excess credit over this cap is carried forward to future accounting periods, while the balance is carried forward to step 4.
- The remaining credit is offset by HMRC against any outstanding corporation tax liabilities which the company has for any other accounting periods.
- Any remaining credit may be group relieved at the option of the claimant.
- Any remaining credit is offset by HMRC against any other liabilities that the company owes to HMRC, such as VAT or PAYE.
- Any remaining credit is payable to the company as a cash credit, provided the company is a going concern.
RDEC scheme – eligible expenditure
The main costs which are eligible for R&D relief are:
- Staff. The costs of employing staff who are directly engaged in carrying out the R&D itself, as well as indirect costs related to some necessary supporting and ancillary activities (eg administration or maintenance activities insofar as undertaken for R&D).
- Sub-contracted activities. Payments made to sub-contractors undertaking R&D activities contracted to them, or undertaking routine activities essential to the principal company’s R&D can be claimed provided the sub-contractor is a qualifying body, an individual, or a partnership with no corporate members. Qualifying bodies are defined as charities, higher education institutes, scientific research organisations, or health service bodies. Different rules apply where the claimant and sub-contractor are connected.
- Externally provided workers. Payments made for workers provided to the claimant by a staff provider (eg agency or personal services company) can be claimed so far as those workers are engaged in undertaking R&D activities under the supervision, direction, and control of the claimant. Qualifying expenditure is restricted to 65%, although different rules apply where the claimant and staff provider are connected.
- Consumable items. Expenditure incurred on, for example, materials, or light, heat, power and water may be claimed, provided that they are consumed or transformed in the R&D process. Expenditure incurred on consumable items which form part of goods later sold or transferred as part of the company’s ordinary business cannot be included.
- Computer software. Payments for licences are claimable so far as the software is used in the R&D activities. This does not include expenditure on hardware, domains, certificates, or internet fees.
- For accounting periods beginning on or after 1 April 2023, costs of data licences and of cloud computing services (including remote data storage) are eligible so far as employed in the R&D (and subject to some cost-recouperation exclusions).
- Payments to participants of a clinical trial, provided the trial is undertaken in connection with the development of a health care treatment or procedure.
- Contributions for independent R&D, provided the person receiving the contribution is an unconnected qualifying body, individual or a partnership with no corporate members.
For accounting periods beginning on or after 1 April 2024, the ‘merged scheme’ implements changes to payments made to sub-contracted activities, externally provided workers, and contributions for independent R&D. Please see the factsheet linked here for further details.
How Saffery can help
Having undertaken claims for companies of all sizes from all sectors (including but not limited to manufacturing, IT, pharmaceutical, construction, food, and beverage and agricultural), Saffery ensures that claims are both maximised and robust.
Our approach is flexible and tailored to your company’s requirements to ensure that the process is cost and time efficient. Our involvement can vary from initial workshops and feasibility work, to reviewing a claim prepared by your company, to preparing the supporting claim documentation alongside you. Our work can help you to identify whether any of your company’s activities might constitute R&D for tax purposes, which scheme is appropriate to claim under, and the quantum of the claim.
Alternatively, if you have already submitted R&D tax credit claims but HMRC has opened an enquiry into your claim, we can work with you to bring this to a conclusion.
If you have any questions on the matters discussed, please get in touch with either Rachel Chappell or Ollie Bull.
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