R&D Tax Credit Relief & RDEC

Research and Development (R&D) is an essential part of any business that aims to grow and innovate. However, it can also be a costly and risky investment. To support businesses in this area, governments across the world offer R&D tax credit relief, providing companies with financial incentives to invest in R&D activities. In the UK, there are two main types of R&D tax credit relief: The R&D tax credit relief and the R&D Expenditure Credit (RDEC).

What is R&D tax credit relief?

R&D tax credit relief is a UK government incentive that allows companies to claim tax relief on their R&D expenditure. This means that companies can reduce their corporation tax bill or receive a cash payment for any losses they have made. R&D tax credit relief is available to all UK companies that are subject to corporation tax, regardless of their size or industry.

To qualify for R&D tax credit relief, companies must be engaged in R&D activities that seek to advance knowledge or capability in a field of science or technology. This could include developing new products or processes, making improvements to existing ones, or undertaking scientific or technological research. The R&D must be related to the company’s trade or business, and the company must be able to demonstrate that it has taken a scientific or technological risk in carrying out the R&D activity.

How much R&D tax credit relief can companies claim?

The amount of R&D tax credit relief that a company can claim depends on the size of the company and the amount of qualifying R&D expenditure. For small and medium-sized enterprises (SMEs), the relief is particularly generous. SMEs can claim a tax credit of up to 33.35% of their qualifying R&D expenditure. This means that for every £100 spent on qualifying R&D activities, an SME can reduce its corporation tax bill by up to £33.35.

For large companies, the relief is less generous. Large companies can claim a tax credit of up to 10% of their qualifying R&D expenditure. However, for R&D activities carried out on or after 1 April 2021, the government has increased the rate of the main rate of corporation tax from 19% to 25%. This means that the overall amount of R&D tax credit relief available to large companies will be reduced, as the increased corporation tax rate will offset some of the relief.

What is the R&D Expenditure Credit (RDEC)?

The R&D Expenditure Credit (RDEC) is another form of R&D tax credit relief that is available to companies that do not qualify for SME relief. The RDEC is available to large companies and SMEs that have received grant funding or have been subcontracted to carry out R&D work by a large company. It is also available to companies that have undertaken R&D activities that are not eligible for SME relief, such as R&D work carried out on behalf of a client.

The RDEC is calculated differently from the SME relief. The RDEC is calculated as a percentage of the company’s qualifying R&D expenditure. For R&D activities carried out on or after 1 April 2021, the rate of the RDEC is 13%. This means that for every £100 spent on qualifying R&D activities, a company can receive a credit of £13.

Unlike SME relief, the RDEC is taxable. This means that the credit is added to a company’s taxable profits, and the company will pay corporation tax on the credit. However, the government has introduced a payable credit for loss-making companies that can be used to offset PAYE and National Insurance contributions.

Which companies can claim RDEC?

The RDEC is available to any company that meets the criteria for R&D tax credit relief and does not qualify for SME relief. This means that the R DEC is available to large companies and SMEs that have received grant funding or have been subcontracted to carry out R&D work by a large company. It is also available to companies that have undertaken R&D activities that are not eligible for SME relief, such as R&D work carried out on behalf of a client.

To be eligible for RDEC, companies must be subject to UK corporation tax and must have incurred qualifying R&D expenditure. The R&D activities must seek to advance knowledge or capability in a field of science or technology and be related to the company’s trade or business. Companies must also be able to demonstrate that they have taken a scientific or technological risk in carrying out the R&D activity.

What expenses can be claimed under R&D tax credit relief and RDEC?

Both R&D tax credit relief and RDEC allow companies to claim relief on a wide range of qualifying expenditures. Qualifying expenditure includes:

• Staff costs: salaries, wages, employer’s National Insurance contributions and pension contributions for employees involved in R&D activities.
• Consumable items: materials, equipment and other costs associated with carrying out R&D activities.
• Subcontractor costs: costs incurred when subcontracting R&D activities to a third party.
• Software: costs incurred in purchasing, leasing or licensing software that is directly used in R&D activities.
• Companies can also claim relief on expenditure that is indirectly related to R&D activities, such as heating, lighting and power.

How can companies claim the R&D tax credit relief and RDEC?

To claim the R&D tax credit relief, companies must include details of their R&D activities and expenditure on their corporation tax return. Companies can also make a separate claim for a cash payment if they have made a loss.

To claim RDEC, companies must make a separate claim for the credit on their corporation tax return. Companies can also claim a payable credit for loss-making companies.

Companies must keep detailed records of their R&D activities and expenditure to support any claims for the R&D tax credit relief or RDEC.

R&D Tax Credit Relief & RDEC Summary

R&D tax credit relief and RDEC are valuable incentives that can help companies to reduce the costs of investing in R&D activities. SMEs can benefit from particularly generous relief, allowing them to reduce their corporation tax bill or receive a cash payment for any losses made. Large companies can also claim relief, although the overall amount of relief available will be reduced due to the recent increase in the main rate of corporation tax. The RDEC is an alternative form of relief available to companies that do not qualify for SME relief, and it offers a percentage credit for qualifying R&D expenditure. The RDEC is taxable, but it also offers a payable credit for loss-making companies to offset PAYE and National Insurance contributions.

Overall, R&D tax credit relief and RDEC are valuable tools for businesses seeking to invest in R&D activities, especially in light of the ongoing challenges and uncertainties facing the global economy. By incentivizing companies to invest in R&D, governments can promote innovation, create new jobs, and ultimately drive economic growth. Companies should carefully consider whether they qualify for these incentives and take advantage of them to maximize their potential benefits. By doing so, they can help to ensure that their businesses remain competitive and resilient in the years ahead.