Research & Development Expenditure Credit (RDEC) Explained
RDEC is available to all companies that don’t meet the criteria to be an SME. That means all large companies but also includes SME companies that are excluded from claiming under the SME Scheme because they have been subcontracted to by a Large or international company or by an individual or partnership, or because their R&D has been subsidised. Subsidies generally come in the form of significant upfront payments on a fixed price contract, a one off payment to support an R&D project, where there is mutual interest from the company offering the subsidy and also where the company has received a grant that covers some or all of the project.
Depending on the nature of the grant all of the eligible project costs will only be claimable under RDEC. Where the grant is EU State Aid or granted under the General Block Exemption Regulations then regardless of the aid intensity (percentage of costs covered) of the grant, all of the projects costs will be claimed under RDEC.
For other grants, or subsidies, the unfunded amount of R&D Eligible costs can be claimed under the SME scheme.
A company can claim for all of the costs that qualify except payments to corporate entities (subcontractors) as part of their RDEC Claim.
What makes a business qualify for the RDEC scheme?
To qualify for the RDEC tax relief, your businesses needs to be carrying out R&D work. This is defined as carrying out a specific project that looks for an advance in either science or technology.
The government sets out specific rules regarding what qualifies as R&D work, and these include stipulations that the work must find an uncertainty, attempt to overcome that uncertainty, and that this work couldn’t be easily carried out by someone in the field. It is on these projects that you can claim R&D tax relief.
It is also important to note that there are actually two separate R&D tax relief schemes – the RDEC and the SME scheme.FIND OUT IF YOU'RE ELIGIBLE
In simple terms, the SME scheme is for smaller businesses and the RDEC is for larger businesses. In practice, qualifying companies for the RDEC scheme are considered to have more than 500 members of staff, as well as either more than €100m turnover or €86m gross assets.
An important distinction between the two is that unlike in the scheme for SMEs, the 13% rate remains the same, this has increased to 20% from 1st April 2023, whether your business is making a profit or a loss.
It should also be noted that in some cases, SMEs can claim tax relief through the RDEC scheme due to restrictions around some grant-related projects in the SME scheme.
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How to calculate RDEC
In theory calculation your RDEC tax relief is simple – but some of the most complex aspects of the process are in understanding exactly what you can claim for, and ensuring that you are maximising the potential of your claim.
To calculate your qualifying expenditure:
- Establish the costs that you can directly attributable to R&D (see above
- Reduce to 65% of the original cost of subcontractor or external staff
- provider payments where relevant
- Add your costs together
- Multiply the figure by 13% to get the expenditure credit
- Put this figure into your tax return
If your relevant R&D spending is £100,000, you will receive an estimated tax refund of £10,530. This figure comes from 13% of the £100,000 (£13,000) minus the 19% corporation tax rate.
If you would like to learn more about the RDEC R&D tax relief scheme, the team at Cooden would be happy to help. We have extensive experience helping businesses get as much out of their tax relief claims as possible – we can do the same for you. You can call us on 01424 225345 or email us at email@example.com for more information.
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