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In this article, we provide a detailed guide to everything you need to know about the UK Research and Development Expenditure Credit – more commonly known as the “RDEC” for short.
What is the RDEC tax incentive and who can benefit?
The Research and Development Expenditure Credit (‘RDEC’) is a UK Government tax incentive available to ‘Large companies’ (see definition below) or SMEs in receipt of grants.
It supplemented and then replaced the legacy ‘Large Company’ enhanced corporation deduction (130%) with effect from 1 April 2016.
This tax incentive caters for companies that are unable to qualify for the more generous SME R&D Tax Credit Relief.
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 9.7% 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 9.7% on qualifying R&D expenditure (at a corporation tax rate of 19%)
- The RDEC allows for greater flexibility for Large Companies as they were previously ineligible for tax credit payments in loss situations up until 1 April 2013
Who is eligible?
What is the definition of an SME for R&D tax purposes?
Group companies need to be considered plus linked or partner enterprises as part of this test.
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.
What is the RDEC enhancement rate?
The current RDEC rate is 12%.
But as the RDEC is taxable, your effective cash tax saving is £9.70 on every £100 spent (at 19% corporation tax rate)
Why is the RDEC referred to as an ‘above the line’ (ATL) credit?
The credit claimed under the RDEC is recognised as income within pre-tax profits in your income statement (and not within the tax line, unlike the SME R&D tax relief).
This gives it increased visibility as it is disclosed above the tax line.
This is why it is often referred to as an ‘above the line‘ credit.
Can large companies claim R&D tax credit rebates if loss-making?
Large companies that are ineligible for the SME R&D tax credit relief can claim cash tax rebates from HMRC under the RDEC relief if they are loss-making.
RDEC Calculation Example – Profitable Company
In this RDEC worked example calculation, we will apply the current 12% credit rate:
|Less: qualifying R&D tax costs|
R&D Tax Credit @ 12%
|Profit before tax|
|CT @ 19%|
Less: R&D Tax Credit
Revised tax payable
R&D Cash Tax Benefit = £38,880 or 9.7% of the £400,000 qualifying R&D spend
RDEC Example calculation – Loss-making Company
Loss-making company example
|Less: qualifying R&D tax costs|
R&D Tax Credit @ 12%
|Loss before tax|
|CT @ 19% (on R&D tax credit)|
Less: R&D Tax Credit
R&D cash tax credit payable to company *
R&D Cash Tax Benefit = £38,800 or 9.7% 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).
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.
Note that with effect from 1 April 2019, any amendments made to include claims for RDEC relief must be filed in a revised and complete CT600 return.
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 the 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 liabilities
The repayable tax credit can be offset 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.
The administrative process for filing an RDEC claim:
With respect to the process for filing a claim, a company is required to prepare and file a technical 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 way to the SME R&D tax credit scheme and therefore there are a number of issues to consider:
- 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
- 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 overcharges to taxation
- Impact on quarterly instalment corporation tax payments should be considered for cash flow planning purposes given that the tax credit calculation has the effect of increasing taxable profits
- 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
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: 01248 305002 / 0161 961
If your company is loss-making in the period, you have a number of options as to how you could potentially benefit from the enhanced loss generated by the R&D tax relief.
These options may be summarised as follows:
- If you have an R&D tax credit surrenderable loss, you could elect to surrender this enhanced tax loss for a tax credit cash rebate from HMRC (calculated at a rate of 14.5%)
- Or you could carry forward the enhanced tax loss carry to offset against future trading profits of the company and benefit from tax relief at a potential rate of 19% or 17% (depending on when the company becomes profitable)
- Or you could elect to carry back the enhanced loss to offset against taxable profits in the previous 12 month accounting period (if such taxable profits are available)
- If the company is part of a group, you could surrender the enhanced loss to a fellow group company as ‘group relief’