Here the team has put together the 7 steps you’ll need to go through in order to make your R&D Tax Credits claim via the RDEC scheme.
Since way back in the early 2000s, R&D Tax Credits have been offered as a tax-based incentive to promote company investment in innovation. Depending on the size, turnover and previous state aid status of a company, it will need to apply for the relief under one of two branches of the scheme: the SME scheme or RDEC.
The SME scheme is more generous and is aimed at companies that have under 500 employees and either a turnover of €100 million or less per year or a balance sheet of less than €86 million per year. However, larger companies that exceed these limits (or any company that has previously received state aid) will need to use the RDEC branch of the scheme instead. Although it’s less generous, claim amounts tend to be substantially higher.
RDEC stands for Research and Development Expenditure Credit. Companies claiming R&D Tax Credits via RDEC can expect to reclaim 13% of their eligible R&D costs.
If the company has turned a profit, then the credit can be used in offsetting its current tax liability. If it has made a loss, it can receive the payment in lump sum payments instead.
RDEC can be accounted for above-the-line in your profit-and-loss account (income statement). This then reflects positively on your firm’s visible profit. In turn, decisions can then be made with more clarity around research and development projects in the future.
It’s worth bearing in mind that RDEC is not related in any way to a company’s tax position. This means it’s easier to predict how much the award will be, so bringing a certain stability to companies in these very challenging economic times. The relief can also be taken into account when making longer term 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 that existed in years previously.
The scheme was launched in 2013 and since then the rate has been changed at various intervals. Indeed, R&D is typically a hot topic in the Chancellor’s Budget.
As mentioned previously, the RDEC rate is currently 13%. It used to be at 11% (up until 31st December 2017), before being increased to 12% from the 1st January 2018 to the 31st March 2020. The 13% rate has been in effect since the 1st April 2020.
When determining how your company will receive its RDEC payment, there are roughly seven steps you’ll need to go through. The point is that the credit is used in offsetting any tax due to HMRC, before any pay outs of tax relief are made.
The government has made it clear that both profit-making and loss-making companies should benefit equally when claiming R&D tax relief via RDEC. The result of this is that the 13% credit is taxable - therefore it’s only paid out net of tax.
The seven steps should be completed in order. It may also be the case that some of your credit is carried forward to a later tax period, depending on the circumstances of your company.
These are the seven steps:
The 13% gross RDEC rate is offset against the company’s Corporation Tax liability for the period during which the R&D project occurred.
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.
At this stage, if you wish, you can surrender up to the entire 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 required, even if the other group companies have their own tax liabilities.
Once this stage is reached, 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.
Companies can spend the credit on anything they like, from debt repayments to dividends. However, many choose to reinvest it in further R&D projects therefore securing more R&D Tax Credit claims in future.
Our team is made up experts from a range of technical backgrounds, all specialising in R&D Tax Credits and other types of R&D funding.
We’re a boutique agency with two decades in business, building up our skills and experience entirely in R&D Tax Credits. Indeed, we put customer service and technical excellence front and centre of everything we do. Whatever area of R&D tax relief claiming you need us for, we aim to become a trusted partner, working alongside your existing tax team, finance or R&D departments.
Whether you’re looking for full guidance through your R&D Tax Credits application, help with your technical report or you’ve simply got a quick question, Myriad Associates is here to help.
Our team are working remotely as always and can complete everything over the phone, email or video call - so it doesn’t even matter where in the UK you’re based.
Call us now on 0207 118 6045 or click on our contact page and we’ll call you back.