Research and Development Expenditure Credit (RDEC): 2017 Autumn Statement Rate Change

In this short video, we consider the changes announced in the November 2017 Autumn Statement to the Large Company Research and Development Expenditure Credit ('RDEC') and work through an example:

Our analysis shows that the impact of the increase in RDEC rate from 11% to 12% is an increase from 8.8% to 9.7% in tax savings generated by the RDEC claim. This is good news for large companies and for those SMEs with grant or subsidised expenditure.

It is just a little disappointing that there was no increase in rates for the SME R&D tax incentive, especially given the decrease in corporation tax rates with effect from 1 April 2017.

What does a qualifying R&D Tax Credit project look like?

In this short video, we provide an insight into the elements of what makes up a qualifying claim for R&D tax credit purposes.

Often companies are unsure of what a successful claim might look like so here we summarise key characteristics (not exhaustive) including:

  • having an idea for a new product, process or service or for an appreciable improvement on what's already available out there in the marketplace;
  • putting together a project plan;
  • exploring what might be technically feasible with your peers (competent professionals);
  • going beyond routine or commonly accepted knowledge to achieve your technical goals;
  • establishing that there is technical uncertainty inherent in your project
  • the ups and the downs of a typical qualifying project (the 'downs' or road-blocks often helping establish that the project goes beyond routine knowledge into the realms of technical uncertainty);
  • the need to invest time and money - as 'eureka' moments won't qualify nor would there be attributable cost to enhance under the relief in such a case;
  • that the project does not have to succeed to qualify for R&D tax relief (aborted projects qualify; in fact they often provide some of the best evidence of technically uncertain and challenging work!).

No single qualifying R&D tax project is ever the same but these are some of the common attributes that might help you think about whether you have been undertaking project work that might qualify under this generous UK government tax relief.

Summary of HMRC R&D Tax Credits Statistics (2015-2016)

Here is a short video summary of the key findings from HMRC's annual report on Research and Development Tax Credits dated September 2017:

The statistics relate to the 2015-2016 year and show a promising uptick in claims for R&D tax relief from previous years. This is no doubt due to an increasing awareness by first time claimant companies plus repeat claims by those companies already claiming.

Key findings from the HMRC R&D Tax Credit Statistics (2017):

  • check
    Total number of claims for R&D tax credits increased to 26,255 (a 19% overall increase)
  • check
    SME claims rose by 22% to 21,865
  • check
    Large company and RDEC scheme claims increased by 5% to 4,385 
  • check
    Average SME R&D tax claims increased to £61,276 from £56,223 in the previous year 
  • check
    Manufacturers were the biggest winners claiming 23% of the total amount claimed by SMEs 
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    London and the South East had the largest claims in both size and volume 

These figures are encouraging but there is still further to go before all of the companies that could claim - do claim. From our experience, the cashflow benefits of R&D tax claims can be significant to a company and therefore it is important that all companies give this tax relief some detailed consideration.

You can access the full HMRC analyses and documents here.

Spring Budget 2017: R&D Tax Credits to Get Better

Philip Hammond delivered his Spring Budget Statement today kicking off his first tax announcement directly addressing the importance of the UK R&D Tax Credits incentive to business and the UK's worldwide competitiveness

"As I committed at the Autumn Statement, we’ve reviewed, with business, our R&D tax credit regime and concluded that it is globally competitive.

But to make the UK even more attractive for R&D we have accepted industry calls for a reduction in administrative burdens around the scheme and will shortly bring forward measures to deliver them"

- Rt Hon. P Hammond, Chancellor of the Exchequer​

Any efforts to reduce the administrative burden and make the R&D tax relief more accessible to companies is welcomed. 

We look forward to hearing more about proposed improvements and helping companies make the most of this most generous UK Government tax incentive​

Research and Development Expenditure Credit (RDEC) Guide

In this article, we provide an detailed look at everything you need to know about the Research and Development Expenditure Credit - more commonly known as the "RDEC" for short.

What is the RDEC tax incentive and who benefits?

The Research and Development Expenditure Credit ('RDEC') is a UK Government tax incentive available to 'Large companies' (see definition below) and replaces the legacy enhanced corporation deduction (30%) with effect from 1 April 2016.

This supplements the SME R&D Tax Credit Relief and applies to companies that are not defined as SMEs.

It can also cover certain situations where the SME R&D tax relief is not available to SMEs (see further below).

RDEC: What are the key tax benefits?

The RDEC provides a reduction in corporation tax payable for profitable companies or a repayable tax credit for loss making companies that equates to 8.8% of the total qualifying R&D expenditure in the period

  • The RDEC allows loss making Large Companies to claim cash tax credits from HMRC - previously only available to SME companies 
  • The RDEC allows profitable Large Companies to pay a reduced amount of corporation tax
  • The RDEC provides a net cash tax benefit of 8.8% on qualifying R&D expenditure (at a corporation tax rate of 20%) - note that for expenditure incurred from 1 January 2018, the effective cash tax benefit will increase to 9.7%
  • The RDEC allows for greater flexibility for Large Companies as they were previously ineligible for tax credit payments up until 1 April 2013

RDEC: Who is eligible?

Large Companies

SME subcontractor

SME - subsidised expenditure

SME > €7.5m

Companies (or groups) that fail the SME thresholds for R&D tax purposes - see further below

SMEs acting in capacity of subcontractors on behalf of Large Companies

SMEs in receipt of grant funding or other subsidised R&D work

SMEs that exceed the maximum SME project expenditure limit of €7.5m 

What is the definition of an SME for R&D tax purposes?

A SME is defined for R&D purposes as a company with:

  • ​< 500 employees AND either:
  • turnover < €100m OR
  • gross assets < €86m

Group companies need to be considered plus linked or partner enterprises as part of this test.

RDEC Scheme: What costs are eligible?

​The following costs are eligible under the Large Company RDEC scheme:

  • staffing costs paid to directors / employees
  • expenditure on externally provided workers
  • software and materials
  • contributions to independent research
  • subcontracted - limited to qualifying bodies and individuals / partnerships

​This is broadly similar to the definitions for SME R&D tax credits although particular note should be taken of the more restrictive interpretation of qualifying subcontracted costs.

RDEC: What is the credit rate?

The current rate of uplift on qualifying expenditure under the RDEC is 11% (10% up until 1 April 2015). The Autumn Statement 2017 announced an uplift in the RDEC rate to 12% for expenditure incurred from 1 January 2018.

The 11% uplift (12% from 1 January 2018) is applied to the total of the qualifying expenditure for R&D tax purposes under the Large Company scheme.

Up until 1 April 2016, Large Companies had access to two R&D tax reliefs:

  • 1
    The legacy Large Company relief that provided for a 30% uplift in qualifying R&D tax costs OR
  • 2
    The RDEC tax incentive


No R&D tax cash credit was available under the legacy scheme noted in point 1 above. This legacy Large Company enhanced R&D relief was phased out in full with effect from 1 April 2016

RDEC: How is tax relief given?

The RDEC operates differently to the SME R&D tax scheme in that the uplift on qualifying costs creates a taxable receipt in the profit & loss account - this compares with the SME scheme that recognises the benefit of the R&D tax relief solely through the company's corporation tax line in its statutory accounts.

​The credit to the profit and loss account increases profits or decreases losses in the period.

This is why it is often referred to as an 'above the line' credit.

It is recognised above the line in order to reflect the benefit of the R&D tax relief to the company. As it can otherwise often be overlooked when processed solely through the tax line - treated in this way, it is more akin to a grant in how it is reflected in the company's accounts.

The credit is taxable and - assuming a corporation tax rate of 20% - the cash tax benefit is currently 8.8% of the qualifying R&D expenditure.

RDEC Calculation Example - Profitable Company

In this RDEC worked example calculation, we will apply the current 11% credit rate:

Profitable company example

Pre R&D

Post R&D

£

£

Turnover

1,200,000

1,200,000

Less: qualifying R&D tax costs

(400,000)

(400,000)

Other costs

(200,000)

(200,000)

R&D Tax Credit @ 11%

44,000

Profit before tax

600,000

644,000

CT @ 20%

(120,000)

(128,800)

Less: R&D Tax Credit

44,000

Revised tax payable

(120,000)

(84,800)

R&D Cash Tax Benefit = £35,200 or 8.8% of the £400,000 qualifying R&D spend 

RDEC Example calculation - Loss-making Company

Loss-making company example

Pre R&D

Post R&D

£

£

Turnover

1,200,000

1,200,000

Less: qualifying R&D tax costs

(400,000)

(400,000)

Other costs

(900,000)

(900,000)

R&D Tax Credit @ 11%

44,000

Loss before tax

(100,000)

(56,000)

CT @ 20% (on R&D tax credit)

(0)

(8,800)

Less: R&D Tax Credit

44,000

R&D cash tax credit payable to company *

35,200

R&D Cash Tax Benefit = £35,200 or 8.8% of the £400,000 qualifying R&D spend *

* Note that there are other conditions that must be satisfied before a cash tax credit is payable to the company under the RDEC scheme (see further below).

As noted above, the rates and consequent cashflow impact will improve from 1 January 2018 when the RDEC rate increases to 12%. This partially offsets the decrease in corporation tax rate from 20% to 19% with effect from 1 April 2017.

Here is an example calculation of the RDEC under the new 12% rate.

RDEC: 7 steps to receiving your cash tax credit rebate

The 7 stage process is designed to ensure that only those companies that are up-to-date with their tax affairs and payments can benefit from the cash tax rebate option

We are going to simplify the 7 step test to 'just' 5 for our purposes. These five stages may be summarised as follows:

1

Deduction of corporation tax at main rate

The repayable tax credit is payable only after first deducting the corporation tax due (including on the tax credit) in the period

2

PAYE / NIC cap

The repayable tax credit is capped by the PAYE/NIC amount paid by the company in the period in relation to the staff engaged in the R&D - note that this cap does not take into account the % apportionment applied to the employee staff costs as part of the claim calculation

3

PAYE / NIC / VAT arrears payable first

The repayable tax credit is payable to the company only after HMRC has checked for any arrears in relation to corporation tax, PAYE / NIC or VAT that will be deductible against the credit in advance

4

Optional set off against group company CT liabilties

The repayable tax credit is offsetable against corporation tax liabilities of group companies in the period

5

Going concern requirement

The company must be a going concern to be entitled to the cash tax credit

Yes, you read it right - we've simplified the 7 stage test into 5 to capture the essence of HMRC's requirements.

RDEC v SME R&D Tax Credit Scheme: What are the differences?

Definition of R&D:

Aside from the fundamental difference in application and approach to give effect to the tax relief within the financial statements of a company, the definitions that underpin the applicability of the R&D tax relief remain the same.

Administrative process for filing a RDEC claim:

With respect to process for filing a claim, a company is required to prepare and file a justification report that supports the underlying nature of the qualifying project work along with supporting claim calculations in the same way as under the SME R&D scheme.

Qualifying costs under RDEC:

In terms of the qualifying expenditure there is one key difference and this is in relation to subcontracted costs.

Subcontracted costs to companies are not eligible under the Large Company scheme. It should be noted, however, that 'externally provided workers' (EPWs) are an eligible cost and therefore it is more important than ever to get the distinction right between EPWs and subcontractor relationships when dealing with RDEC claims.

It should also be noted that in the more restricted situations where the subcontracted costs do apply (e.g. for work subcontracted to qualifying bodies such as Unis or to individuals), the 65% cap that applies under the SME relief does not apply.

RDEC tax incentive: Some practical issues to consider

The RDEC is applied in a fundamentally different ways to the SME R&D tax credit scheme and therefore there are number of issues to consider:

  1. How the tax credit is treated in the profit and loss account under accounting standards - sometimes it is classified as a grant; however, this is for discussion with your accountants or auditors 
  2. Impact on the financial accounts going forward if an estimate is of the tax credit is included or the claim is later challenged by HMRC and subsequently reduced. It is important to track the credit subject to tax in the accounts and to make any adjustments in the tax computation for under or over charges to taxation
  3. Impact on quarterly instalment corporation tax payments should be considered for cashflow planning purposes given that the tax credit calculation has the effect of increasing taxable profits 
  4. Impact on the effective tax rate for group tax planning given the higher profits subject to tax after taking into account the above the line tax credit

Don't forget about the Patent Box

The RDEC has been designed to work alongside the Patent Box and therefore companies with qualifying patents should ensure that they have considered how to optimise the Patent Box tax relief in addition to the RDEC.

How we can help you with your RDEC claim

We are specialists in R&D tax credit claims and can offer an end-to-end solution in preparing and filing your RDEC claim with HMRC.

We are also accountants so this means that we can also advise on how your claim fits into the 'bigger picture' of your overall company tax profile.

Give us a call for a no obligation discovery call:​

HMRC R&D Tax Credits Simple Guide

HM Revenue & Customs has recently released a "simple" guide for companies seeking to claim research and development tax relief (R&D tax credits)

Here in this short video we scroll through the pages of the HMRC R&D tax relief guide and give our insights on the points covered in the document:

With the subtitle "Making R&D easier for small companies", the guide is useful for companies that may be new to the R&D tax credit incentive as it seeks to cover the key principles for qualification, eligible costs and some common areas of complexity (e.g. SME definition, subcontractor status etc).

Here's what we like about it:

  • Useful summary of how to show that your project qualifies within the R&D tax rules
  • Clear illustrated example on applying the SME definition in group situations
  • Example of a project timeline and elements that might fall in / out of qualifying costs  
  • Clear explanation of eligible and ineligible expenditure
  • Some good case studies - to help bring it to life
  • FAQs section and glossary - to help with the jargon!

There's not a lot not to like about this guide and it is a useful addition to the overview that HMRC already provides (which is a bit more generic). 

You can download the R&D Tax Relief Simple Guide here. ​

Tech Startups – Boost Your Funding with R&D Tax Credits

It is all too easy for UK technology startups to get bogged-down in the red-tape of running a business. Founders are frequently caught up trying to keep on top of books and records to ensure compliance with UK government and HM Revenue & Customs requirements - especially with one eye on a 'clean' future exit event.

This compliance distraction is often at the expense of the myriad of government tax incentives that exist to provide financial and cashflow support to UK startups and fast growing clever companies (potentially a significant expense if missed...).

During the early funding rounds, the Seed Enterprise Investment Scheme ('SEIS') and Enterprise Investment Scheme ('EIS') can provide a much welcomed boost to equity financing - It seems that the attraction of the SEIS and EIS tax incentives have caught the imagination of many tech startup entrepreneurs and business angels alike and we continue to help increasing numbers of start-up companies access and navigate these tax incentives.

​"Yet we continue to be surprised by the number of tech company founders who are unaware of the R&D tax credits incentive and the potential positive impact this tax relief could have on the company's cashflow (potentially year on year)"

The R&D tax incentive can be claimed alongside the SEIS and EIS tax reliefs to help provide a further boost to the cash equity injection. Also, don't forget that the R&D tax credit relief aims to complement the UK Patent Box tax incentive.

Tech startups can recover up to 33% of the costs that they have incurred on qualifying R&D projects and with the level of innovation across the UK in the tech space, these claims are becoming increasingly commonplace.​

​So if you are the founder of a tech company in the UK (or from abroad if you have a UK branch), make sure you don't miss the cashflow funding benefits of the R&D tax credits incentive.

Yet More R&D Tax Credits Success for CRM Software Development company

Following on from a successful R&D tax credits claim totalling £245,000 when we were first engaged to act last year, our client has just secured a further £188,000 in cash tax relief under the UK R&D Tax Incentive! 

Our initial claim totalling £245,000 covered two accounting periods and has since allowed the company to expand its software development team thereby accelerating its progress.

The company was profitable in its most recent financial period and therefore our claim for enhanced R&D tax relief wiped out a corporation tax liability of £54,000 AND created a tax loss that the company could surrender for R&D tax credits totalling £134,000. 

The Company is engaged in the development of CRM software architecture. The nature of its technical work involves the development of proprietary algorithms capable of optimising the interactions of the CRM system with its users. 

If your company is engaged in the field of software development, please contact us to discuss your potential eligibility for R&D Tax Credits further

You got SEIS / EIS Advance Assurance – Now What?

"SEIS" and "EIS" are very much buzzwords in the world of startups and funding right now. You may have already secured advance assurance from HMRC that your company qualifies under either or both schemes but then you start to wonder - what next...?

Here we share some practical pointers on what you as the Founder should consider as your next steps:

1. GET READY TO OFFER SHARES IN YOUR COMPANY TO INVESTORS

Understand your obligations to your investors. Take professional advice particularly in relation to your offer document and any shareholders agreement. It is fresh issues of shares only that qualify under SEIS & EIS. Also, remember your obligations extend for at least three years beyond the issue of the SEIS / EIS shares to your investors

2. DRAW UP A DETAILED SHARE CAPITAL TABLE (IN SPREADSHEET FORMAT)

No Founder can be without a detailed spreadsheet share cap table with each step mapped out from the Founder (subscriber) share issues and then for each round thereafter (SEIS, EIS and onwards). This allows the Founder to keep track of respective valuations, % shareholdings and to observe dilutions at each stage

3. SEIS FIRST, EIS AFTER (ALWAYS)

That order ONLY. So if you are planning on fundraising for both (and you have advance assurance for both) ensure that you allow at least ONE day to pass between the issue of the SEIS shares and the EIS shares thereafter

4. WATCH THE GROSS ASSETS LIMITS FOR SHARE SUBSCRIPTIONS

A ‘nice to have’ problem that many Founders would be envious of (!) but make sure that any share subscriptions from investors do not breach the ‘gross assets’ test at the time of the share issue. More likely to be a problem under SEIS with its lower £200k gross assets limit

5. DON’T LET ANY SEIS / EIS INVESTORS BREACH THE 30% LIMIT

This is where your nifty spreadsheet will come into play. Make sure that % shareholdings are shown and that no SEIS / EIS investors ever exceed 30%. Watch out for “associates” whose shareholdings will be aggregated e.g. spouses, parents, grand-parents, children, grand-children (brothers & sisters are okay)

We have a further 5 tips for Founders (so 10 in total) that we have pulled together into a handy one-pager PDF tip sheet. You can download it now via the link below

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