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Thinking of claiming R&D Tax Credits? Larger companies and those that have previously claimed state aid may need to use the RDEC scheme. Find out more.
The R&D Tax Credits scheme isn’t as straightforward as it might first appear; in fact, it’s divided into two branches - the SME scheme (which most applications come under) and the RDEC scheme (used for larger companies as well as those who have previously received state-funded grants).
Confused? Very possible. Working out exactly what the criteria is for each - and how it relates to your R&D project - is a tough call. So here we’ll look at the key features of the RDEC in particular.
RDEC is one half (if you like) of the R&D Tax Credits scheme, which is a UK-government tax incentive designed to encourage investment in innovation within the private sector.
The scheme is aimed at larger UK companies that are liable for UK Corporation Tax, to help with the costs involved in carrying out eligible R&D (research and development) activities. SMEs (small and medium sized enterprises) usually only take advantage of the SME scheme with its more generous rate of relief.
Generally speaking, a company that is large enough to apply for R&D tax relief under the RDEC scheme will meet the following criteria:
However, in some particular cases, SMEs can’t actually use the SME scheme so have to use the RDEC branch instead. This can be for a few reasons but is mainly due to previous state funding: see our article How State Aid Affects An R&D Tax Credits Claim for more information.
The RDEC rate currently stands at 13%. However, because it is paid net of Corporation Tax, the RDEC effective rate a company receives is worth 11p for every £1 of R&D expenditure. It’s the third rate increase since the RDEC scheme was launched in April 2013. It’s also good news for companies taking advantage of the incentive, especially as they have benefited already from an increase in generosity when the new reduced rate of Corporation Tax (19%) came into effect on the 1st April 2017.
The benefit can be shown ‘above the line’ (ATL), meaning it is displayed as income in your accounts.
RDEC payments are included in a company’s above-the-line section of their income statement (also referred to as the profit-and-loss account). This provides a positive indication of a company’s profitability, which in turn can impact on its investment decisions regarding R&D.
Since RDEC is not related to the company’s general tax position, it’s actually quite easy to work out how much is due. This offers a lot more stability, making it easier for larger companies to factor the relief into their strategies for growth moving forward.
Unlike the previous larger company scheme that ended in 2016, RDEC is also open to loss-making companies, not just ones that are turning a profit.
RDEC adheres to the guidelines set out by the Department for Business, Innovation and Skills to make clear which activities are classed as eligible R&D. These are often known as the ‘BIS guidelines’ and are applicable to both the SME and RDEC R&D tax relief schemes alike. What qualifies for R&D Tax Credits is purposefully broad and applies to all companies regardless of their sector.
The point to note is that qualifying activities generally involve a company taking a risk by seeking to solve a specific technological or scientific uncertainty. So if your business is developing new products, services or processes (or modifying existing ones) then it’s likely the work will qualify for R&D Tax Credits.
Eligible expenditure under the RDEC scheme includes:
It is intended that both loss-making and profit-making companies claiming R&D tax relief via RDEC are treated equally. So the credit is offered net of tax.
This area can potentially become complex very quickly, and every company’s circumstances are different. This is why we strongly recommend using the services of an experienced firm of R&D tax relief professionals such as ourselves, to make sure you’re clear on how to make an application under the RDEC scheme and how the criteria applies to your specific company. Get in touch.
The RDEC regime legislation was put together so that it could be accounted for in profit-before-tax (PBT), instead of being part of the tax charge/(credit), which effectively makes it more visible. Additionally, many companies monitor performance based on PBT, so accounting for RDEC in this way means it’s more likely to influence any company decisions.
For the purposes of accounting, gross credit can be reconciled above-the-line in the company’s income statement (it usually shows as ‘other income’). It doesn’t have to be done this way however, and the precise accountancy treatment can depend on a range of factors. These can be things like when you compile your RDEC claim compared to when you file your accounts, as well as the methods used to arrive at your RDEC figures. The credit itself is considered as taxable income, irrespective of where in the accounts it is shown. Again, our team will be happy to guide 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 us on 0207 118 6045 or use our contact page.