RDEC (research and development expenditure credit) is a UK government tax incentive designed to reward innovative companies for investing in research and development (R&D). It is targeted at large companies, but it is also accessed by SMEs in some circumstances.
What is RDEC?
RDEC is one of two R&D tax credit incentives offered by the UK government to promote private sector investment in innovation. The tax relief is for large UK companies that are subject to UK Corporation Tax, carry out qualifying R&D and spend money on those activities. SMEs are usually eligible for the SME R&D tax credit, which differs from RDEC: it offers a more generous tax credit rate and a wider eligible cost base. However, in certain circumstances, SMEs are prevented from using the SME incentive, and therefore claim through RDEC instead.
• An RDEC tax credit is worth 13% (Previously 12%) of your qualifying R&D expenditure.
• The credit is taxable at the normal Corporation Tax (19%) rate which effectively means the benefit is worth 11p for every £1 you spend on qualifying R&D.
• The benefit can be shown ‘above the line’ (ATL) – this means it is visible as income in your accounts.
• The credit is offset against your tax liability or, in some circumstances, is payable in cash.
Benefits of RDEC
RDEC can be accounted for above the line in your income statement (also known as your profit-and-loss account), providing a positive impact on visible profitability in your accounts. This visibility in turn has a positive impact on R&D investment decisions.
Since RDEC is independent of your company’s tax position, the benefit you receive is easier to forecast. This provides far greater stability and makes it easier for large companies to factor the relief into their investment decisions.
Unlike its predecessor, the large company scheme (defunct as of 1 April 2016), RDEC also offers a cash credit for loss-making companies.
What is the RDEC rate?
The RDEC rate is 13%. However, because the RDEC rate is paid net of Corporation Tax, the RDEC effective rate you receive is worth 11p for every £1 spent.
The RDEC rate was increased in the Spring 2020 Budget from 12% to 13%. This was the third time the RDEC rate has increased since its introduction, which is great news for companies using the incentive.
RDEC qualifying activity
RDEC uses the guidelines produced by the Department for Business, Energy and Industrial Strategy to define the activities that constitute R&D. These are sometimes referred to as the ‘BIS’ or ‘BEIS guidelines’ and apply to both RDEC and SME R&D tax credits alike. The definition of R&D for tax purposes is purposefully broad and applies to all companies whatever their size or sector.
If your company is taking a risk by attempting to ‘resolve scientific or technological uncertainties’ then you may be carrying out a qualifying activity. If your company is creating new products, processes, or services, or modifying existing ones, there’s a good chance you’re carrying out qualifying R&D.
Qualifying expenditure for RDEC is:
• Staff costs, including salaries, employer’s NIC and pension contributions, as well as some reimbursed business expenses.
• Money spent on Externally Provided Workers (EPWs) and some (limited) subcontractor costs.
• Expenditure on materials and consumables like light, power and heat that are used up or transformed in the R&D process.
• Some types of software costs.
• Money paid to clinical trial volunteers.
• Contributions to independent research.
Filing RDEC In 7 steps:
• Discharge any liability to Corporation Tax for the accounting period. The gross RDEC rate (13%) is offset against your Corporation Tax liability for the period to which your R&D tax credit claim relates.
• Adjustment to reduce the net of the tax amount. To ensure that only the net amount of the credit is payable in cash, if the amount remaining after step 1 exceeds the net value of the credit (gross credit less Corporation Tax), the balance is withheld and carried forward for you to use in future periods.
• Limit to PAYE/NIC of R&D staff. The payment of the cash credit is subject to a cap based on the PAYE and NIC paid to HMRC relating to the employees included in your RDEC claim. Amounts over the cap can be carried forward for use in future periods.
• Discharge Corporation Tax liability for any other accounting periods. Before the credit is paid in cash, HMRC may offset it against any outstanding Corporation Tax owed for any other accounting periods.
• Elect whether to surrender for group relief. You can surrender up to the credit amount available at this step (as well as any amount restricted at step 2) to a group company to offset their tax liability. But you don’t have to do this; you can still receive a cash payment even if other companies in your group have tax liabilities.
• Discharge any other liabilities of your company with HMRC. Any amounts remaining at this step will be offset by HMRC against other taxes if amounts are outstanding. For example, overdue PAYE or VAT liabilities.
• Cash credit payable to company.