Specialist R&D Tax & Grant Funding Advisors
The RDEC scheme is mainly used by larger companies to receive R&D tax relief. Take a closer look at the key features of the RDEC scheme...
R&D Tax Credits can be a confusing and complicated space to enter. With two branches that cater for different, but sometimes overlapping, types of companies that complete R&D (research and development) activities, you’d be forgiven for asking for clarification.
The SME scheme, which most small and medium-sized enterprises make their applications through, is the most popular. But the RDEC scheme is designed to catch those who do not qualify for the favourable tax rates of the SME scheme.
The RDEC scheme is predominantly used for larger companies and SMEs who do not meet the requirements of the SME scheme.
In this article we’ll take a closer look at the key features of the RDEC scheme, focusing on:
RDEC is an R&D Tax Relief incentive that’s administered by the UK government and aims to encourage private sector investment in innovation. The RDEC scheme largely benefits bigger UK companies that are liable for UK Corporation Tax and offers them support for the costs of carrying out eligible R&D activities.
SMEs are usually encouraged to apply for R&D tax credits through the SME scheme which has a more generous rate of tax relief. But there are cases where SMEs do not qualify for the SME scheme, and must therefore turn to the RDEC scheme instead.
But in general, to apply for R&D tax relief under the RDEC scheme, companies either have to employ over 500 people, have a minimum annual turnover of €100 million, or have a balance sheet of over €86 million.
The RDEC scheme provides eligible companies claiming R&D tax relief with a credit worth 13% of their R&D expenditure. This credit is taxable at the usual Corporation Tax rate (19%). Because this benefit is designed to help boost innovation as much as possible, it can be shown ‘above the line’ (ATL), which is displayed as income in your accounts. The R&D credit can then be offset against the company’s Corporation Tax liability or, in some cases, even be paid out in cash.
By including RDEC payments in the above-the-line section of the income statement (or in the profit-and-loss account), this government scheme provides a positive indication of a company’s profitability. Consequently, this profitability can impact the company’s investment decisions regarding R&D, boosting investment in the area.
On top of this, RDEC is not related to a company’s general tax position. Therefore, the benefit due is much easier to predict, offering more stability. The RDEC scheme makes it easier for companies to make decisions on future R&D strategies as it is easier to factor into their growth plan.
Unlike the previous larger company scheme (which was terminated in April 2016), the RDEC scheme is now available to loss-making companies. It’s been deliberately developed to offer the same amount of support to both profit and loss-making companies.
The RDEC rate is currently at 13% but is paid net of Corporation Tax. This means the RDEC effective rate received by companies is worth around 10p for every £1 of R&D expenditure.
The rate has increased three times since the introduction of the scheme in April 2013, increasing by a percentage point each time and last increased in 2020, and in 2017 before that. This is good news for companies who are taking advantage of the incentive who can already benefit from the reduced rate of Corporation Tax (19%) which came into effect in April 2017.
Eligible R&D activity is clearly outlined in the Department for Business, Innovation and Skills (BIS). The RDEC scheme follows the same guidelines in deciding what is eligible for R&D tax relief under the SME scheme. R&D tax credits are available for many businesses, regardless of sector, due to these purposefully broad guidelines.
Qualifying activity can generally be defined by activities that seek to advance science and technology by overcoming technical uncertainties, as determined by a competent professional. If your business is developing new products, services, or processes, or sufficiently modifying existing ones, then it will likely qualify for R&D tax relief.
Costs companies can claim on under the RDEC scheme include:
To offer the same value to profit and loss-making companies, the RDEC scheme has a particular way of offering tax credits. To treat the two fairly, the credit is offered net of tax.
This is an area of tax relief that can quickly become complicated and is entirely dependent on the individual circumstances of each company.
We strongly recommend using the professional services of an experienced R&D tax relief firm, such as ourselves, to make sure your application capitalises on the entirety of this scheme and you gain clarity on the RDEC tax relief you will receive.
The RDEC scheme’s legislation was created in a way that allows for it to be accounted for in profit-before-tax (PBT), instead of being part of the tax charge, effectively making it more visible. Since many companies assess performance based on PBT, accounting for RDEC in this way has more of an effect on the company’s decisions regarding R&D.
For accounting purposes, gross credit can be reconciled above-the-line in the business’ income statement (often as ‘other income’). However, the precise accountancy treatment will depend on your company’s specific circumstances and a range of factors, like when you file your RDEC claim compared to when you file your accounts, or the methods used to arrive at your RDEC figures.
The credit itself will be taxable income, irrespective of its treatment. We would be happy to advise on this.
To discuss how our team of R&D specialists and chartered tax advisers can help your business with its RDEC claim, please feel free to get in touch. Whether you would like assistance in getting started, want to plan a future claim, or simply have a burning question and need advice, we’re here to help.
Call our friendly team on 0207 118 6045 or use our contact page.
Please contact us to discuss how working with Myriad Associates can maximise and secure R&D funding opportunities for your business.
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