What is the RDEC scheme?

The Research and Development Expenditure Credit Scheme lets large companies claim Corporation Tax Relief when they are involved with research and development activities.

It replaced the previous ‘Large Company Scheme’ in April 2016.

UK research and Development Grant Funding tax credit guide

Who is it for?

The RDEC scheme is for ‘large companies’, as defined by HMRC. Your business is classed as a ‘large company’ if you have more than 500 staff and have either more than £86m gross assets, or more than £100m turnover.

Companies that are operating under these thresholds can still claim Tax Credits for their Research and Development work, but they use the separate ‘SME R&D Tax Credit Scheme’. You can use our free R&D guides to find out more about other opportunities for your company.

How is it different to the old scheme?

The main difference between the old and new schemes is that now large companies making a loss can claim R and D.

How much is a claim worth?

The recently released government report into R and D Tax Credits put the average claim for large companies at £348,916.

Simply put, the credit calculation is 11% of your R and D expenditure; almost 9p for every pound you have spent on research and development projects.

You can receive the money one of two ways, depending on whether your company is making a profit or loss. It can be given as a cash payment, or to settle your Corporation Tax bill.

How does the RDEC scheme work?

You need to identify R and D projects, work out the breakdown of your expenditure on those activities and calculate how much RDEC you are entitled to claim.

What R and D costs are eligible for the RDEC scheme?

Not all of your expenditure on R and D projects will count as eligible for the RDEC scheme.

For example, these costs are not included: capital expenditure, rent on business property, business rates, land, trademarks, patents, making and distributing your goods and/or services.

But there are many costs that are included in the RDEC scheme:

  • Consumables: including materials for building prototypes, energy bills, water
  • Directly employed staff: this means a percentage of Class 1 NICs, pension contributions, wages and salaries. This is only applicable to work done directly for the R and D project, not work that would happen regardless of the project’s existence (e.g. payroll).
  • Agency staff: 65% of costs of staff provided by an outside agency are eligible
  • Subcontractors: only subcontracted work done by one of the following; health service organisation, institute of higher education, charity, scientific research body, or individual (expert) or partnership.

How do I work out when to claim for?

It can be tricky to work out the exact time period that you are including on your R and D claim. Basically, your R and D ‘activity’ begins when you start work on ‘resolving the uncertainty’ and ends when you either find the solution or stop work on it.

The time frame of your claim will be governed by these two points.

  1. The start of your R and D project must clarify the precise issues you are investigating and attempting to solve. It must also include proof that there isn’t already a solution to this problem in existence somewhere else.
  2. The end of your project is determined before any production starts. For example, if you have use your R and D to make a new product, the R and D claim period stops once you have developed a working prototype and before you go into mass production.

If further issues arise that require more R and D investment, this simply becomes a new R and D claim.

What evidence do I need to make a claim through the RDEC scheme?

The scheme itself has guidelines and support materials to help you submit a complete and accurate claim. You need to explain how your R and D projects meet all the criteria.

This includes how you investigated an advance in science and technology by overcoming ‘uncertainty’. You need to show that you were not sure of the outcome before you started, that the knowledge you sought doesn’t exist elsewhere and that a subject matter expert couldn’t simply answer the question for you. Then you must explain your project, including how you attempted to solve the problem posed.

Many businesses take a ‘team’ approach to this part of the claim. HMRC need to be able to understand what you are saying and they are not expected to have in-depth knowledge of every field. So your technical and scientific staff need to provide explanation that may need translated by a non-expert for the purpose of submitting an understandable claim.

You must also evidence a full breakdown of the eligible R and D costs.

Making an RDEC claim

The Calculation: Eligible R & D costs + 65% external staff costs = total R and D costs x 11% = expenditure credit total

Your expenditure credit figure goes on your Company Tax Return Form (CT600).

You have up to two years after the end of the accounting period in which the R and D project fell to make an RDEC scheme claim. After this deadline, you forfeit any possible payment.

Using the expenditure credit

Your R & D credit has to be used to settle your Corporation Tax bill (for the relevant accounting period). If your RDEC credit is more than the total cost of R and D employees’ NICs and PAYE, then the difference will be carried forward to the next accounting period. After paying the current accounting period’s Corporation Tax bill, any RDEC credit left over can be used to pay off any other Corporation Tax liabilities you may have or other outstanding bills (like VAT). The final amount can be made as a cash payment to your company. Our R&D tax credits calculator can help you estimate what type of savings you could achieve.

Other factors that affect your RDEC claim

An RDEC claim is very detailed, precise and totally unique to your business. There are other factors that may impact on your RDEC claim, such as where your company and/or the R and D projects take place; in the UK or abroad? Also, if you haven’t paid any NICs or PAYE, it doesn’t stop you making a claim but it does affect how you receive your credit. If you are involved as a subcontractor working on someone else’s R and D project, there are rules which differentiate between SMEs, large companies and ‘other’. It is good to know that you will have a dedicated expert in DSM combing through all of these regulations to produce your complete, accurate and fully optimised RDEC claim.

One piece of entirely good news; subsidies or grants that you may have been awarded do not affect your R and D claim at all.


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