What is RDEC Scheme?
RDEC stands for the Research and Development Expenditure Credit which is a UK government scheme to reward innovative businesses, introduced in 2013. Where SME scheme provides R&D incentives to smaller companies, RDEC scheme renders R&D incentives (R&D Tax Credits & R&D Tax Relief) to larger companies with than 500 staff members, turnover exceeding €100m, and gross asset of more than €86m. RDEC scheme treats both qualifying loss and profit-making companies equally, providing both of them with 13% of R&D Tax Credits.
What are Eligibility Criteria to Make R&D Tax Credit Claim via RDEC Scheme?
- Any UK-based company working on a qualifying R&D project meets the prerequisite for R&D incentives and can claim R&D Tax credits through RDEC Scheme.
- RDEC scheme is initiated for large companies which exceed the limits of the SME scheme.
- Notified state aid limits your R&D tax credits claim and let you claim partly or fully through the RDEC scheme. SMEs which have availed of notified state aid in the past may not be able to have access to SME Scheme as notified state aid limits SME scheme, so they can also claim R&D incentives via RDEC scheme. That’s why before claiming grants you should be aware of its impact on your R&D Tax credits claim. As grants are usually received before projects so if you want to claim for R&D Tax credits above mentioned impacts will occur.
- Those SMEs which are partly owned approx. 25-50% by a large company are classified as a ‘partner enterprise’. Partner enterprises might claim via RDEC scheme.
- The businesses owned more than 50% by the large company are categorised as ‘linked enterprise’ and for such businesses, HMRC will decide scheme to apply for R&D tax credits taking balance sheet, workforce, and gross asset into account.
- Those subcontractors who are carrying out R&D on the behalf of some other company can claim R&D incentives via the RDEC scheme only.
What is the Qualifying Expenditure for RDEC Claim?
Any expenditure directly linked with research and development qualifies for RDEC claim. To make it clearer, the following is the list of qualifying expenditure for RDEC claim:
- Staff costs, salaries, and pensions
- Cost of subcontractors and external workers working on R&D project
- Cost of materials used in the project
- Expenditure on consumables (light/ power/heat) required for the R&D project.
- Software and license costs
- Expenditure on volunteers for the project
- Research costs
How to Claim for R&D incentives via RDEC Scheme?
These are the easy steps that you need to follow to claim R&D Tax Credits via the RDEC scheme:
1- Offset any corporation tax liabilities
13% RDEC credit is offset against the company’s corporation tax for the accounting period in which the R&D project was done.
2- Reduce to the net of the tax amount
In case the remaining amount after step 1 is exceeding the net value of the credit i.e. gross asset subtracted from corporation tax, then the balance should be retained and added in future periods. This is done to ensure that only the net credit amount is payable in cash.
3- Limit the credits to NIC/PAYE cap
HMRC limits the credits to the total value of NIC and PAYE, cost paid to your staff involved in RDEC project added in RDEC claim. Any exceeding amount of the PAYE/NIC cap can be retained for later accounting periods.
4- Discharge corporation tax liabilities from other accounting periods
Before cash payment of credits, you may offset any outstanding corporation tax from previous accounting periods.
5- You can surrender R&D credits for group relief
At this point you can surrender R&D credits to another group company if you want, to offset against tax liability. That does not mean that you won’t receive your credits if other companies in your group will have outstanding liabilities.
6- Deduct other tax liabilities
At this point, you are required to deduct other tax liabilities from previous accounting periods.
7- Credits paid by HMRC
If your company does not become subject to HMRC’s enquiry, you will receive your cash credit.
RDEC can impact your business positively and offer more stability to large companies. The process of RDEC claim is quite complicated and haunts many companies. You can take help from our R&D tax credits consultants who can do all these calculations for you.