RDEC Scheme | R&D tax relief explained

The RDEC scheme is a taxable credit offered by the government to promote private investment in innovation. It’s available to large companies in the UK that incur costs related to research and development (R&D) activities and to SMEs that are ineligible for the SME R&D scheme due to grants or subsidies, or have been subcontracted to do R&D work by a large company.

Under the RDEC scheme, the benefit is delivered as a taxable ‘above the line’ credit, in the main body of the company’s income statement before the tax charge.

• Qualifying R&D expenditure is eligible for a 13 per cent RDEC tax credit
• The credit is subject to Corporation Tax, resulting in a 10.53 per cent benefit (£1,053 per £10,000 of qualifying expenditure)
• The credit can offset against the company’s tax liability, the tax liability of another company in the group, or in some circumstances, is delivered as a cash payment

For costs pre 1 April 2020, the rate was 12 per cent, giving an after tax benefit of 9.72 per cent.

By including the RDEC credit in your income statement, the visibility and ease of forecasting future credits can positively impact further R&D investment decisions – even if the company is loss-making.

Most businesses that have a tax agent will submit corporation tax returns using tax software, and an R&D claim should be included within this, either in your original submission, or an amended return within the time window for making amended claims. 

If you are not represented by an agent or advisor, you can claim the credit via HMRC online by entering your expenditure into a full Company Tax Return form (CT600), submitting separate claims for each accounting period. 

With either option, you will also have the option to submit evidence to support your claim in the form of a technical report explaining how the company’s activities meet the eligibility criteria, and also an analysis of the financial calculation included. This is strongly recommended to speed up the process.

Once you have identified eligible activities, you will need to assess which expenditure items qualify for the RDEC tax credit. The following areas apply:

• Staff costs: salaries, bonuses, employer’s NIC and pension fund contributions and some reimbursed business expenditure
• Externally provided workers: for example, workers used to augment the company’s headcount, engaged to work under the company’s direction, through a staffing agency or personal service company
• Expenditure on software licenses used to deliver the R&D project.
• Consumable items such as materials and utilities (heat, light, power and water)
• Subcontractor costs undertaken by a qualifying body: e.g. a charity, higher education institute, scientific research, or health service body; an individual; or a partnership of individuals
• Contributions to independent research
• Payments to clinical trial volunteers

The R&D incentive schemes are particularly generous regimes, and HMRC rightly pay close attention to ensuring that these incentives are correctly focussed towards eligible businesses. As such, claims should be supported by documentation that:

• articulates the activities within the business that meet the qualifying criteria, referencing the BEIS Guidelines (2004); 
• sets out the methodology for preparing the claim; and
• analyses the eligible costs, disclosing how these have been calculated. 

Where RSM assists you in making a claim, we would typically recommend a self-standing report with financial appendices that provides all this information. 

By going through these steps, you will help HMRC process the claim faster, and minimise the risk of further  enquiries, or extending the period for which an enquiry can be raised (through discovery assessments where insufficient information is initially provided), bringing you earlier certainty over the outcome of your claim. 

A claim for RDEC needs to follow the ‘seven steps’ and results in a taxable benefit. Companies must follow the ‘seven steps’ to unlocking cash as follows:

1. Payable credit used to discharge corporation tax liability for the claimant company in that period
2. If there remains a surplus after Step 1, reduce the remaining amount by the tax rate, to give a net of tax amount (the tax amount is carried forward for offset against future corporation tax liabilities)
3. Remainder used to discharge corporation tax liabilities for any other period
4. Remainder after Step 3 capped at the total PAYE/NIC of R&D staff, and proportion of group employees involved
5. If a member of a group, can surrender to another group company
6. Discharge any outstanding liability of the company to HMRC
7. Balance is payable as a credit