This is the first question we answer at the start of an R&D tax relief claim. In the UK, there are two ways of claiming R&D Tax Relief: The R&D Tax Credits scheme and the Research and Development Expenditure Credit (RDEC) scheme.
There are two main differences between the schemes:
- The size of your business – R&D Tax Credits is for SMEs and the RDEC scheme is for large companies
- The amount of tax relief you get – R&D Tax Credits is paid at a rate of 33% and the RDEC scheme is 13%
Let’s delve into the details a bit more, so you can determine which scheme is right for you.
What size is your business?
To use the R&D Tax Credits scheme, you need to be considered a small or medium-sized enterprise (SME). This is defined as:
- You have up to 500 employees
- You have a maximum of £100 million turnover or £86 million gross assets
The Research and Development Expenditure Credit (RDEC) scheme is for larger companies that have:
- more than 500 staff members
- annual turnover that’s more than £100 million, or over £86 million gross assets
I thought SMEs can use the RDEC scheme too?
There are cases where SMEs can access the RDEC scheme – if the R&D work isn’t eligible for the R&D Tax Credits scheme because:
- You received notifiable state aid, as a grant or subsidy, to help fund your R&D project
- Your SME is subcontracted by a large company to do R&D work
This is an additional, confusing factor when determining which R&D tax relief scheme applies to you. In essence, if you’re an SME and you think you’re disqualified from using the R&D Tax Credits scheme, look and see if you can use the RDEC scheme instead.
What level of tax relief is attached to each scheme?
The R&D Tax Credits Scheme is a more generous tax relief, but the scale of large company operations means that even the lower RDEC rate gets substantial tax relief for those companies.
R&D Tax Credits:
- This scheme allows you to take off an extra 130% of your qualifying R&D costs from your annual profit, taking it to a 230% education in total
- Even if you’re making a loss, your tax credit can be claimed with a value of up to 14.5% for the surrenderable loss
- You get 13% of your qualifying R&D expenditure back
- 11p for every £1 R&D spend
- This tax credit is either paid as a cash lump sum, or offset against your corporation tax liability
- R&D tax credit can be shown as income in your accounts because it can be written as ‘above the line’
Are there any other differences between the two schemes?
An absolutely crucial factor that’s the same for the two schemes is what actually counts as an R&D project. Whichever scheme you use this definition is the same.
As we’ve seen, the amount of tax relief available is different and so are some of the qualifying costs. For example, under the R&D Tax Credits scheme you can include 65% of your subcontractor costs in your claim. But there are very specific restrictions on the subcontractor costs you can include in an RDEC claim, like those of a scientific research organisation or a charity. Other subcontractor costs don’t qualify.
A big bonus of the RDEC scheme is that you’re still able to make a claim if you receive government grant funding. This is not the case for R&D Tax Credits.
Don’t worry about sorting it out by yourself
Deciding which R&D tax credit scheme to use is the first of several tricky decisions in this area of tax relief. You also have to make sure your project is considered R&D, only include the correct qualifying costs and make sure you’ve got all the evidence you need to support your claim.
This level of detail is what’s still putting so many companies off taking this amazing opportunity. But, with our average claim of £49,000, it’s such a waste. You do need to invest some time, but we can take care of the paperwork and accuracy of your R&D tax relief claim – whether you’re using the RDEC or R&D Tax Credit scheme.