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Since the year 2000, the UK government has offered R&D Tax Credits as an incentive to promote private sector investment in innovation.
The R&D tax credit scheme is divided into two branches:
The RDEC scheme is designed for bigger, more established UK companies which are subject to UK Corporation Tax and that have spent money on R&D projects.
The SME scheme is usually for smaller companies (with under 500 members of staff). And, although the SME scheme is more generous, RDEC claims usually, by their nature, offer a much larger R&D claims pay-out.
To find out more about the differences between the two R&D tax relief schemes, read this.
Companies claiming R&D Tax Credits using the RDEC scheme should have:
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 which means it will be visible as income in your accounts. This will have a positive impact on your company’s visible profit and will positively impact the way decisions around R&D investment are made in the 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.
RDEC also offers a cash credit for loss-making companies so the RDEC scheme can be used by all larger companies, regardless of whether they’re profitable or not.
The Research and Development Expenditure Credit Scheme was introduced back in 2013 to enable larger companies to claim R&D tax relief.
Companies claiming R&D Tax Credits using the RDEC scheme can receive 13% of their applicable R&D expenditure.
The credit is taxed at the usual 19% Corporation Tax rate, effectively meaning it will be worth 11p 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 13%. This is an increase from the previous rate which was at 12%. The current rate represents the third 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 seven steps to go through when determining how your company will receive its RDEC credit. The main objective of the process is to offset any tax owed to HMRC, before any R&D tax relief is paid. The intention is that both loss-making and profit-making companies are treated equally when claiming RDEC. The result of this is that the 13% credit is taxable, so is only paid out net of tax.
The seven steps to making an RDEC claim should be completed in the below order. This might mean that some of your credit is carried forward to a later tax period, depending on your company’s circumstances.
The 13% gross RDEC rate is offset against the company’s Corporation Tax liability for the period during which the R&D work took place. If there is any RDEC credit leftover (i.e there were not enough profits, or the company had losses) then carry the balance to step 2.
Step 2 is in place to make sure that loss-making companies receive the same net benefit as profit-making companies. 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.
This step restricts the payable amount to the company’s total expenditure on R&D workers’ PAYE and NIC for the accounting period. The payment of the R&D 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.
After step 3, if there is any amount of RDEC remaining it should be set against any outstanding corporation tax liabilities of the company for other accounting periods. For instance, 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 your company is a member of a group, in step 5 you can choose to surrender the whole or any part of the remaining amount after step 4 to any other member of the group. Or, you could choose not to surrender to a group company, in this case the amount will be carried forward and subjected to Steps 6 and 7.
Once you reach this step, any amount remaining will be taken by HMRC for use against other taxes if outstanding amounts exist. These could be things like VAT liabilities or overdue PAYE.
The amount remaining after Step 6 is payable to you, on the proviso the conditions of s104S are met, e.g. the company is a going concern.
Our friendly, specialist R&D tax team includes technical R&D specialists and tax advisers who are all on hand as and when you need them. We have over a decade of experience advising larger, complex companies on their R&D tax credit claims. We take the time to understand your goals and requirements and like to work, as a trusted partner, alongside your existing tax team or finance department.
The specific R&D tax credit service we provide will depend on your company type, size and structure, as well as 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 best place to come 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.