The 7 steps of an RDEC claim

The R&D Tax Credits 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 the Research and Development Expenditure Credit (RDEC).

The RDEC scheme is designed for bigger, more established UK companies. 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.

At this point, it’s worth taking a look at our recent article: Everything you ever needed to know about RDEC.

What are the benefits of the RDEC scheme?

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 ended in April 2016.

What is the RDEC rate?

The current RDEC rate (since April 2020) stands at 13%.

Historically, the rate was at 12%. The current rate represents the third increase since the scheme’s inception in April 2013.

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.

How will my company receive its RDEC payment?

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 13% 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:

Step 1: Discharge any liability to Corporation Tax for the accounting period

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.

Step 2: Adjustment to reduce to net of tax amount

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.

Step 3: Limit to NIC/PAYE of R&D employees

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.

Step 4: Discharge liability for Corporation Tax regarding any other accounting 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.

Step 5: Decide whether to surrender for group relief

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.

Step 6: Discharge any other company liabilities with HMRC

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.

Step 7: Receive your cash credit

Job done! Your cash credit is paid, ready to plough back into your business - including further R&D projects.

Speak to the experts at Myriad Associates

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’ll call you back. Don’t let your company miss out!