The Research and Development Expenditure Credit scheme fully replaced the old Large Company scheme in April 2016. The great news is that the new scheme allows businesses to claim even when they are making a loss; this is the main difference between the new RDEC and old Large Company scheme.
The amount you are able to claim for is a little higher and you can claim for ‘Externally Provided Workers’, but not all subcontractors.
How much is it worth?
RDEC credit is calculated at 11% of your company’s Research and Development expenditure. This increase of 1% came into effect in April 2015.
The government has deliberately taken the RDEC calculation ‘above the line’ in order to focus the incentive on the departments that are directly involved with the actual R&D activities. This is different to the ‘enhancement’ model used in the Large Company and SME R&D Tax Credit schemes.
If you are making a loss, you can offset the amount against your tax liability. If your company is making a profit, you can receive it as a cash payment.
Is my business a ‘large company’ under the RDEC scheme?
For the purposes of this scheme, you are a large company if you have 500 or more staff and either an annual turnover of £100+million, or gross assets worth £86million.
If your company does not meet these thresholds, you can still benefit from R&D tax credits using the ‘SME R&D Tax Credit Scheme’.
Which projects qualify for RDEC?
The qualifying criteria for both project type and specific expenditure are the same for all R&D Tax Credit claims.
Your project must be in your field, or developing a new direction for your company with the outcome of the project, and broadly defined as science or technology. This does not include social sciences or purely theoretical fields.
Above all, your project must aim to either improve or make a new service, product or process.
The project must meet four main criteria to qualify for RDEC:
- Demonstrate that you aim to make an “advance in the overall field” that is not just locally applicable to your own business. It does not mean being the first to apply something that already exists to your business sector.
- Showing ‘uncertainty’ in your initial aim; not being sure of the outcome of your project when you embark. Whatever you are researching must be an unknown to experts in the field and your company.
- ‘Show your working out’ by recording the stages of your research. This includes all your testing and the analysis of those results. You have to support your claim with an explanation of how you tried to resolve the ‘uncertainty’, in layman’s terms. Failures count just as much as successes here.
- Prove that ‘professionals in the field’ could not simply figure out your advance. You can do this by making sure the experts working on your project have verifiable qualifications and experience, and have them explain the thinking behind the project.
What R&D costs can I claim for?
Under the RDEC scheme you can claim certain R&D costs from the day you start your project until you conclude it, or make your discovery. Applicable R&D expenditure includes: proportional staff costs, specific subcontractors and consumable items used during the research project. A full list of qualifying expenditure and how it could apply to your R&D activities is available here.
Are there any downsides to the RDEC scheme?
The only real downside to the allowable costs in the RDEC scheme is that not all subcontractors are included. This is different to the SME R&D criteria. Only limited subcontractors, like university employees, are included.
Some companies held off switching to the RDEC scheme from the previous Large Company Scheme because it involves a more detailed record of costs. The reward for this diligence is a robust set of evidence to support your claim.
Good to know…
- Your R&D project does not have to have a successful outcome to make a claim under RDEC.
- The definition of ‘qualifying activity’ remains broad, so you can apply a wide vision lens to your company when you are considering what R&D you ‘do’.
- Start any R&D project with clear records and track the subsequent expenditure as you go. This builds your case as you go, keeps it water tight and means you are more likely to have a successful RDEC claim.
- Decide how you are going to explain the changes to your company’s financials when they include your RDEC figures. Stakeholders will want to understand and will be as delighted as you with the future investment into your next innovation.