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For many years, the UK government has offered R&D Tax Credits as an incentive to promote private sector investment in innovation. The scheme is divided into two branches, mostly depending on the size of the company claiming: there’s the SME scheme for smaller companies, and for larger organisations there’s RDEC.
The RDEC scheme is designed for bigger, more established UK companies that have paid out money for R&D projects and which are also subject to UK Corporation Tax. SMEs generally must apply for their R&D tax relief using the SME scheme which is slightly different from RDEC in that it’s more generous. Having said that, RDEC claims are usually, by their nature, much larger.
Companies claiming R&D Tax Credits using the RDEC scheme should have more than 500 staff and at least €86 million gross assets or €100 million turnover. However, some SMEs can also claim using RDEC if, for example, they've received certain state-funded grants.
RDEC can be accounted for above-the-line in your profit-and-loss account (income statement), which will have a positive impact on your company’s visible profit. This visibility will in turn positively impact the way in which decisions around R&D investment are made in future.
As RDEC bears no relation to the tax position of your business, the amount you get is much easier to predict. This offers a lot more stability, making it easier for larger companies to take the relief into account when making investment decisions.
The RDEC scheme can be used by all larger companies regardless of whether or not they’re profitable. This is an improvement on the older scheme which ceased to exist in April 2016.
Companies claiming R&D Tax Credits using the RDEC scheme can receive 12% of their applicable R&D expenditure. The credit is taxed at the usual 19% Corporation Tax rate, effectively meaning it will be worth 10p for every £1 spent on relevant R&D activities.
The credit can be used either in offsetting a company’s current tax liability or in certain cases can be paid as a cash lump sum.
The current RDEC rate stands at 12%. However, as the rate is paid net of Corporation Tax, the actual RDEC rate a company will receive is worth 10p for every £1 spent.
Historically, the rate (before the Autumn Budget of 2017) was at 11%. The current rate represents the second increase since the scheme’s inception in April 2013. It’s great news for companies making use of the incentive, particularly as they were already about to benefit from a reduction in Corporation Tax down to 19% which took effect on the 1st April 2017.
There are roughly seven steps to go through in determining how your company will receive its RDEC credit. The point is that the credit is used to offset any tax owed to HMRC, before any pay out of relief is made. The intention is that both loss-making and profit-making companies are treated equally when claiming RDEC. The result of this is that the 12% credit is taxable, so is only paid out net of tax.
The seven steps should be complete in order and may mean that some of your credit is carried forward to a later tax period, depending on your company’s circumstances.
Here are the seven steps:
The 12% gross RDEC rate is offset against the company’s Corporation Tax liability for the period during which the R&D work took place.
In order to make sure that only the net credit amount is payable in cash, if after step 1 the amount remaining is more than the net value of the credit (gross credit minus Corporation Tax), the balance should be retained and brought forward to be used in future periods.
The payment of the cash credit is subject to a cap. This cap is based on the PAYE and NIC paid to HMRC in relation to the staff included in your RDEC application. Amounts that are more than the cap can be retained for later periods.
Before payment of the credit is completed in cash, HMRC may look to offset it against any outstanding Corporation Tax still owed from accounting periods that have passed.
If you wish, at this step you can surrender up to the whole credit amount available to a group company by way of offsetting their liability for tax. It’s entirely up to you however; you can still have a payment in cash if you wish, even if the other group companies have their own tax liabilities.
Once you reach this step, any amounts that remain will be taken by HMRC for use against other taxes if outstanding amounts exist. These could be things like VAT liabilities or overdue PAYE.
Our friendly, multi-skilled team is made up of technical R&D specialists and tax advisers all on hand when you need them. We have considerable experience advising larger, more complex companies and will take the time to understand your goals and requirements. We aim to become a trusted partner, to work alongside your existing tax team or finance department.
The specific service we provide will depend on your company type, size and structure, as well the particular challenges you’re facing. Whether it’s a quick question you need answering, or full guidance through your application, Myriad Associates is the place to turn for all aspects of your R&D tax relief claim.
Call us today on 0207 118 6045 or use our contact page and we will be pleased to get back to you.