Research and Development expenditure credit (RDEC) explained

Research and Development expenditure credit (RDEC) is a tax incentive that encourages and rewards UK private sector business’ investment in innovation, by reducing Corporation Tax payable. Ian Batkin of Luvo Financial explains.

What is Research and Development expenditure credit (RDEC)?

Research and Development expenditure credit (RDEC) is one of the tax schemes available in the UK that is designed to encourage UK private businesses to invest in innovation in return for rewards. It can be claimed by companies that are subject to Corporation Tax and which carry out and spend money on qualifying research and development (R&D).

RDEC can be claimed by large companies, which is defined as those with:

500 or more staff
more than either €100m turnover or €86m gross balance sheet value

RDEC can also be claimed by SMEs that either:

have received a grant or subsidy for their R&D
are sub-contracting R&D on behalf of another business (and are therefore not eligible to claim under the SME R&D Tax Credits scheme)

How does RDEC compare with the SME R&D tax credits scheme?

What qualifies as eligible R&D is essentially the same under both RDEC and the SME R&D tax credits schemes. However, there are some differences between the two schemes:

Broadly speaking, the costs that can be claimed are the same for both schemes, with one exception when it comes to sub-contracted R&D costs; in general, these cannot be claimed under RDEC unless the sub-contractor is an individual, a partnership, a charity or a higher education establishment.
The rate of relief under RDEC is certainly less generous than under the SME scheme, with a realisable benefit of just under 11 per cent of R&D expenditure under RDEC, compared to about 33 percent under the SME scheme.
There are fewer claims made under RDEC than under the SME scheme, but the average claim value is somewhat higher under RDEC – in the region of ten-times higher than under the SME scheme due to a significant number of these claims being made by high-expenditure larger companies.

Should you claim Research and Development expenditure credit (RDEC)?

The first step is to identify whether your company is ‘innovating’, as recognised under the qualifying criteria and RDEC:

If a business is standing the risk and cost from seeking to achieve advances in developing new or improved products, processes or services, by overcoming scientific or technological issues/uncertainties.

If this applies to your business, then you will be carrying out qualifying activity and be able to claim R&D tax credits - either under the SME or RDEC schemes based on the earlier definitions of size. However, always remember that RDEC isn’t just for large companies; it’s also a useful tax incentive that can be claimed by SMEs that are prevented from claiming under the SME R&D tax credits scheme.

Claiming R&D tax credits under either scheme reduces Corporation Tax liability and if your business has no Corporation Tax liability, you can usually claim the credit as a cash payment (which is potentially even more important and beneficial in these current unprecedented times).

Where forced to claim under RDEC, companies can still realise a worthwhile realisable benefit/return on their investment in R&D, which will also provide encouragement and funding for continued expenditure on this differentiating activity.

How is Research and Development expenditure credit (RDEC) calculated and accounted for?

The RDEC tax credit is currently claimable at 13 per cent of qualifying R&D expenditure. This is then taxed at the normal Corporation Tax rate (currently 19 per cent), which realises a net benefit to the claimant of 11p for every £1 of spend.

The RDEC rate was increased from 12 percent to 13 percent in the Spring 2020 Budget, which was the third increase since the scheme was introduced less than five years ago. The aim of this latest increase is to further encourage and reward private businesses to invest in R&D and continues to be well-received by eligible companies that do claim it.

The RDEC benefit is accounted for ‘above-the-line’ (within Profit Before Tax (PBT)), usually as ‘Other Income’ within the Profit and Loss (P&L). This makes it more visible, more likely to impact investment decisions, and more attractive for some businesses. It’s the fundamental difference between RDEC and the SME scheme, under which the benefit (reduced charge or payable credit) is reflected within the taxation line.

Ian Batkin Luvo