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How to make an RDEC claim

The complete guide to compiling and submitting an RDEC claim. Includes an explanation of the differences between the two schemes.

RDEC scheme explained

The Research and Development Expenditure Credit is commonly known as the RDEC Scheme. The RDEC scheme is a UK government tax incentive that promotes innovation amongst the UK’s larger businesses. It is one of two tax credit schemes. 

Introduced in 2013, it allows companies to claim R&D credits “above-the-line” as taxable income rather than as a below-the-line benefit. This represents a significant difference from the SME R&D scheme.

The RDEC scheme replaced the previous Large Company scheme, which didn’t offer this above-the-line accounting treatment.

Who can make an RDEC claim?

Any UK company with qualifying R&D projects can make an RDEC claim. If you’re unsure if your activity counts as R&D, then it’s worth reading our R&D eligibility guide.

However, if you’re undertaking R&D, then you first need to decide on whether you can claim through the SME scheme. The SME scheme delivers back up to 27% (up to 33% prior to April 2023), whereas the RDEC scheme effectively delivers up to 15%. Prior to April 2023, the RDEC scheme delivered up to 11%, but the rate for the RDEC scheme increased to 20%, resulting in a 15% benefit after applying corporation tax.

The question to ask is, who must use the RDEC scheme rather than the SME scheme?

Large Businesses

For the most part, the RDEC scheme is designed for larger businesses. If you have 500+ employees, and either more than €100 million turnover or €86 million gross assets, then you’ll need to claim through the RDEC scheme rather than the SME scheme. In addition to larger companies, three types of SMEs must use the RDEC scheme for all, or some, of their claim.

Recipients of Notified State Aid

Small companies that have received “notified state aid” may need to claim either partly or fully through the RDEC scheme. Most government-backed grants will qualify as notified state aid, although there are some exceptions. Additionally, the number of projects you claim for, and whether the grant is project-specific or not, will have an impact. Find out more in our guide to grants and R&D relief.

Before claiming a grant, you should fully consider the impact the grant will have on your ability to later claim R&D tax credits. Typically, grants will pre-fund an R&D project, whereas R&D tax credits provide funding after the R&D project has started. However, taking a grant before the project may mean you need to claim via the RDEC scheme rather than the SME scheme.

Partner and Linked Enterprises

Secondly, SMEs whose ownership is partly held by a large company may need to claim through the RDEC scheme. If a large company owns between 25-50% of the voting or share capital in the business, then it will be classified as a “partner enterprise”. In that case, the equivalent % of the partner enterprise’s workforce, balance sheet and gross assets must be taken into account when considering the size of the claimant’s company. For example, if your SME is 33.33% owned by a company with 1500 employees, then your employee count would be 500 + your company’s headcount.

If a large company owns more than 50% of the voting rights or share capital of your company, or it satisfies other tests of control outlined by HMRC here, then it will be classed as a “linked enterprise”. In the case of a linked enterprise, its total workforce, balance sheet or gross assets will apply to your company’s profile when deciding which scheme to apply for. For a detailed understanding of whether you might have a linked or partner enterprise, then we recommend using the EU criteria for SMEs (which HMRC have applied) or getting in touch with one of our team.

Subcontracted R&D

Thirdly, if you are carrying out R&D on behalf of another company as a subcontractor, then you will need to claim through the RDEC scheme rather than the SME scheme. This is to prevent excessive subsidisation of the same R&D projects by multiple companies, as the contracting company can also claim R&D tax credits for the work.

How much can you claim with RDEC

For accounting periods beginning on or after April 2024

For accounting periods on or after 1 April 2024, companies of all sizes – including large corporations and SMEs – will be required to submit claims under a merged scheme. This new merged scheme will function akin to the current RDEC scheme, albeit with adjustments to the net benefit and with some additional changes.

The RDEC tax credit stays at 20% of a company’s R&D spend. Under the combined scheme, the credit is taxed at the standard Corporation Tax rate (19% to 25% based on taxable profits).

The net benefit of RDEC is:

  • 15% for companies subject to Corporation Tax at the main rate of 25%
  • 16.2% for companies subject to Corporation Tax at 19% or in a loss-making position
  • Based on their tax position, companies receiving marginal relief may have an effective relief rate between 14.7% and 16.2%.

Key changes in the merged scheme:

  • Overseas R&D: Overseas subcontractor or EPW costs can no longer be included in the R&D claim, with limited exceptions.
  • Contracted out R&D: Costs for R&D contracted out to a subcontractor can be included in the claim, subject to specific legislation.

For accounting periods ending on or after 1 April 2023

In the 2022 Autumn Statement, the chancellor increased the RDEC rate from 13% to 20%. However, this increased rate only applies to costs registered on or after 1 April 2023. 

Therefore, if your 2023 claim covers a period before and after 1 April 2023, it will be subject to both rates. Any costs lodged before 1 April 2023 will be credited at 13%, and any fees after 1 April 2023 will be credited at 20%. It’s also important to know that the main corporation tax rate increased from 19% to 25% on 1 April 2023, altering the RDEC calculation.

To help clarify, here’s an example RDEC calculation: if a company has £1,000,000 worth of R&D spending after 1 April 2023, they will receive 20% above-the-line credit (£200,000). That credit will be taxed at the new 25% Corporation Tax rate, so their net gain would be £150,000, resulting in a 15% benefit.

You can learn more about the broader reforms to the scheme in our guide on R&D tax relief reforms in 2024 to understand how to calculate the size of your new claim with the recent R&D tax relief rate changes.

For accounting periods ending on or before 31 March 2023

Prior to April 2023, companies could claim up to 13% credit on their qualifying R&D expenditure. However, the credit was subject to corporation tax, which was at 19%. The net credit was, therefore, approximately 11p back for every £1 spent.

To help clarify, here’s an example RDEC calculation: if a company has £1,000,000 worth of qualifying R&D costs after 1 April 2022, they will receive 13% above-the-line credit (£130,000). That credit will be taxed at the 19% Corporation Tax rate, so their net gain would be £105,300.

How do companies receive the credit?

Companies receive the credit as a cash payment or a reduction on their corporation tax bill, depending on their financial position. Loss-making companies receive a cash credit, and profit-making companies receive a reduction.

claim-benchmarking

An overview of the R&D tax relief rates changing

The table below provides a comprehensive overview of the changes in R&D tax relief rates over time, as announced in recent autumn statements and spring budgets.

Company Type SME Scheme RDEC Scheme Merged Scheme
Up to 31/03/2023 From 01/04/2023 Up to 31/03/2023 From 01/04/2023 For accounting periods starting on or after 01/04/2024
Profitable company 130% uplift on costs = 24.7% net benefit 86% uplift on costs = 21.5% net benefit Headline rate 13% = 10.5% post-tax Headline rate 20% = post-tax rate between 14.7% – 16.2% Headline rate 20% = post-tax rate between 14.7% – 16.2%
Loss-making company Costs plus 130% uplift = 230 x 14.5% repayable credit = 33.4% subsidy Costs plus 86% uplift = 186 x 10% repayable credit = 18.6% subsidy 10.5% subsidy 15% subsidy 16.2% subsidy
Loss-making R&D intensive company N/A Costs plus 86% uplift = 186 x 14.5% repayable credit = 26.97% subsidy N/A N/A N/A

Accounting treatment for the RDEC scheme

In 2013, the government changed the accounting treatment of the RDEC scheme so that the credit now appears “above-the-line”.

The motivation for the change was that it allows the departments that carry out R&D to show the credit as income when calculating their profit before tax. Prior to this change, the credit would be accounted for in the broader company income statement. The change ensures that those making the decisions to conduct R&D are clearly remunerated.

While that was the stated intention, the broader benefits are also significant. By placing the credit above-the-line, the visible income of the company is positively impacted. This increases the appeal of businesses in the eyes of investors and the public markets. It has become a significant factor for multinationals in deciding to locate their R&D activities in the UK.

Qualifying costs for the RDEC scheme

In general, the information available on qualifying costs for the R&D tax credit scheme will apply to the RDEC regime. However, in the RDEC scheme (prior to the merging of the scheme for accounting periods on or after 1 April 2024), you cannot claim for subcontracted R&D unless the subcontractors are: “an individual, a partnership (each member of which is an individual), or a qualifying body”.

A qualifying body is “a [UK] charity, an institution of higher education such as a university, a scientific research organisation or a health service body.” (HMRC CTA09/S1142). The most common qualifying bodies we see claimed for are UK universities and NHS hospitals. The government also maintains a list of overseas bodies which qualify.

While this gives scope to claim for some subcontractor costs, the most significant exclusion from this list, however, is limited companies. In our experience, the majority of subcontractors we file against in the SME scheme are limited companies.

It’s also worth noting that the costs for Externally Provided Workers (EPWs) are claimable under RDEC. This is where the difference between subcontractors and EPWs becomes critical. EPWs are workers hired under your own company’s direction, whereas subcontractors are hired under their own direction as external experts.

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The definition can be critically important when deciding on the size of your claim, so we recommend consulting our guide on the differences between EPWs & subcontractors. You can also look directly at HMRC’s definitions of EPWs and subcontractors.

Submitting an RDEC claim

When submitting an RDEC claim, there are seven steps that you need to complete before the submission happens.

To help explain these steps, we’ve provided example company financials below:

  • £2m accounting profit before R&D costs
  • £400,000 R&D costs
  • £70,000 PAYE & NIC costs relating to R&D
  • £200,000 corporate tax loss
  • No other outstanding tax liabilities
  • RDEC rate is assumed to be at 20%

The company will need to then undergo the following seven steps to calculate its RDEC credit:

1. Offset corporation tax liabilities

Firstly, you’ll need to offset any pre-existing corporation tax liabilities from the headline RDEC credit rate. If you have a credit remainder, then that carries on to step 2.

Example: R&D Costs of £400,000 x 20% = £80,000. No corporation tax liability, so all of the £80,000 carries forward to Step 2.

2. Apply the notional tax rate

In order to ensure that both profit and loss-making companies receive the same net benefit, you’ll need to apply a “notional tax rate” of 25% to the balance regardless of your financial position.

Example: £80,000 RDEC credit – 25% = £60,000 RDEC credit carried forward to Step 3. £20,000 carried forward to future accounting periods, which reduces future corporation tax liabilities.

3. Limit the credit to the R&D PAYE/NIC cap

HMRC cap the credit to the total value of the PAYE and NIC contributions for the workers involved in this RDEC claim. Any amounts in excess of the PAYE/NIC cap will be carried over to next year’s claim period,

Example: PAYE & NIC Costs of £70,000, so £60,000 credit passes to Step 4.

4. Honour corporation tax liabilities

At this stage, you must honour any corporation tax liabilities held from previous accounting periods. Those will then offset the credit amount due here.

Example: No corporation tax liabilities from previous accounting periods held. £60,000 carried on to Step 5.

5. Surrendering the credit for group relief

The amount taken from step 4 can be transferred to another group company to offset against their tax liability. This is optional. You can still receive your credit even if other companies in your group have outstanding tax liabilities.

Example. No group relief opted for. £60,000 carried on to Step 6.

6. Honour other tax liabilities.

Now you’ll need to deduct any other tax liabilities held from previous accounting periods, eg unpaid VAT or PAYE.

Example: No additional liabilities held. £60,000 carried on to Step 7.

7. Credit paid after HMRC tests.

If your company is a “going concern” and is not subject to an HMRC enquiry on its tax return, then the credit will be paid out in full.

Example. £60,000 paid out as cash credit (15% of total R&D expenditure).

This process can become quite complex for some companies, especially if they have liabilities from prior accounting periods. At EmpowerRD, we offer consultations at the late stages of the RDEC claim process if needed. So get in touch with our team, and we’ll be happy to advise on your specific case.

How EmpowerRD manage RDEC claims

At EmpowerRD, our intelligent online claims platform makes the entire process of creating an RDEC claim significantly easier than working the traditional way: with an accountant, traditional advisor or managing the claim in-house.

Platform Benefits

Our platform allows for multiple users to easily contribute either cost or narrative information to the claim. Each contribution can be tracked by the claim coordinator to ensure that the claim is built quickly and effectively.

Our intelligent guides and prompts also ensure that the technical contributions are easily drafted and refined by your engineering team. This significantly speeds up the process of compiling a claim, ensuring that the disruption to the tech team is kept to a minimum. Typically it takes a company less than a week to compile a claim with EmpowerRD, although some have completed the process in a few hours. This compares with the 2-3 month timelines from traditional advisors.

Service Benefits

In addition to the benefits of our platform, you will be allocated a claim manager who will help you to compile your claim report. Before submission, our team of ex-HMRC inspectors and ex “big 4” accounting specialists will check your claim to ensure it passes our submission standards. Should you wish, we’ll also submit the claim for you and deal with any HMRC queries at no extra cost.

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