Research and Development Expenditure Credit Scheme Explained in Detail

The Research and Development Expenditure Credit Scheme is a tax relief program designed to encourage businesses to invest in research and development (R&D) activities. This scheme allows companies to claim a credit against their corporation tax bill for eligible R&D expenditure.

Eligible R&D activities include experimentation, testing, and analysis aimed at developing new or improved products, processes, or services. These activities must be carried out in the UK and meet specific criteria, such as being aimed at resolving scientific or technological uncertainties.

To be eligible for the scheme, R&D expenditure must be incurred on qualifying activities, which can include salaries, wages, and subcontracted costs. The scheme also allows for a credit on the cost of certain capital items, such as equipment and software.

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The Research and Development Expenditure Credit (RDEC) scheme is an incentive provided by the UK government to encourage companies to undertake innovation and development activities.

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The scheme rewards companies with a taxable grant-like credit based on their research and development costs.

You may qualify for the scheme if you fall under one of the following conditions:

The RDEC scheme can be claimed by small and medium-sized enterprises (SMEs) who have been subcontracted to do R&D work by a large company or who have received a grant or subsidy for their R&D project.

Many SME businesses do not understand this split and either claim incorrectly or miss out on substantial additional benefits.

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The RDEC tax credit is an unmissable opportunity for large companies to receive the reward they are entitled to, particularly as the government has increased the RDEC rate.

Claiming RDEC can provide a tax reduction or cash credit worth up to 16.2% of your investment in qualifying R&D expenditure.

A project doesn’t need to succeed to qualify for relief, making investing in R&D more lucrative and lessening the financial risk of failure.

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RDEC provides an above-the-line credit, meaning it is accounted for in your P&L before interest and taxation (EBIT), which has a visible impact on your company’s income.

This makes it easier for relevant stakeholders, such as R&D budget setters, to see the positive impact development work has on the company’s financial position and long-term success.

The specialist team at Alexander Clifford can help you maximise your RDEC tax credit claim with their streamlined process, which has resulted in good news for hundreds of businesses.

By claiming RDEC, you can unlock several benefits, including financial fuel for your business, improving your financial position, increasing competitiveness, and securing collaboration and partnerships.

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Qualifying costs for the Research and Development Expenditure Credit (RDEC) scheme are extensive and varied. You can claim relief on employee costs, including salaries, wages, bonuses, and pension contributions, as long as they're directly or indirectly involved in R&D activities.

Agency staff and subcontractor costs are also eligible, but from 2024, these costs incurred overseas will be restricted, and claims will only be allowed in exceptional circumstances.

You can claim hosting and data costs related to the R&D project, as well as utilities like fuel, power, or water. Materials and consumables used in the R&D project are also eligible, such as items like fuel, materials, power, and water.

Software used by the R&D team is also qualifying expenditure. You can claim a limited amount of subcontracted R&D expenditure, including payments to universities, individuals, or partnerships.

Here are some examples of qualifying costs:

Additionally, you can claim expenses related to cloud computing and data licensing incurred in accounting periods starting on or after 1 April 2023. Pure mathematics is also a qualifying activity, as long as the work contributes to resolving a scientific or technological uncertainty.

To claim Research and Development Expenditure Credit (RDEC), you need to assess qualifying R&D activity and calculate qualifying R&D expenditure. HMRC recommends keeping adequate records to ensure a smooth claim process.

You can claim RDEC by submitting the figures in your CT600 tax return. This is a straightforward process that requires some basic information about your R&D activities.

HMRC allows you to claim RDEC up to two years after the end of the accounting period you are claiming for. This gives you some flexibility when it comes to submitting your claim.

To make an RDEC claim, you'll need to follow 7 key steps, which include taking advice on eligible projects and costs, filing or amending your corporation tax return, and waiting for HM Revenue & Customs to respond.

Here are the 7 steps to make an RDEC claim:

Note that you can claim RDEC for eligible costs, which include staffing costs, consumables, software, subcontractors, prototype costs, clinical trial costs, and research contributions.

Accounting for RDEC can be complex, but it's essential to get it right to maximize the benefits of your research and development work. You can claim the credit by entering your expenditure into the full Company Tax Return form (CT600), which will appear as other income in your accounts.

The RDEC credit is an above-the-line credit, designed to make it easier for companies to understand the benefit of their research and development work. This means it will be recorded as taxable income in your P&L.

Depending on whether your company is profit or loss making, the credit may be used to discharge the liability or result in a cash payment. However, for businesses paying in quarterly instalments, the scheme benefit falls outside of these calculations.

Navigating the accounting and taxation aspects of an RDEC claim can be tangled, and it's recommended to engage R&D tax specialists who possess expertise in addressing both the tax and accounting policy ramifications.

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First, HMRC will use your Research and Development expenditure credit to pay off any outstanding corporation tax you owe for the accounting period.

If your company is profitable, the tax owed on your credit will be deducted from the initial RDEC credit rate. This is the first step in settling your corporation tax liability.

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The corporation tax liability is settled by deducting any existing corporation tax obligations from the initial RDEC credit rate. If a credit surplus remains, it proceeds to the next step.

Here's a step-by-step breakdown of how the RDEC tax credit is applied to settle corporation tax liability:

Most companies will either discharge their corporation tax liabilities in this step or obtain a cashback in the final step. However, HMRC has seen issues with discharging other liabilities, which has brought about an extra form within the tax return to track these movements.

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You can make a claim for RDEC up to two years after the end of the accounting period it relates to. This allows you to account for your research and development expenditure in a timely manner.

To claim the credit, you'll need to enter your expenditure into the full Company Tax Return form (CT600). The credit will then appear as other income in your accounts, improving the profitability of your business or business unit making the claim.

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The accounting treatment of an RDEC claim can be complex, so it's essential to have an R&D tax advisor who can cover both the tax and accounting policy implications. This will help you navigate any potential issues and ensure you're taking advantage of the credit correctly.

Your Research and Development expenditure credit should be treated as taxable income and recorded above the line in your P&L. This is because RDEC was designed as an above-the-line credit to make it easier for companies to understand the benefit of their research and development work.

If you capitalise your R&D costs, the treatment will be different. This is an important consideration when accounting for RDEC relief.

The RDEC scheme benefit does not factor into the calculations for businesses that make quarterly payments. This means you'll need to consider this when determining how to claim the credit.

You have the opportunity to secure credit by inputting your expenses in the comprehensive Company Tax Return form (CT600). This will allow you to offset liabilities or lead to a cash disbursement, depending on your company's profitability.

HMRC will use your Research and Development expenditure credit to pay off any outstanding corporation tax you owe for the accounting period you're claiming for. This includes the tax owed on your credit, if your company is profitable.

The size of RDEC credit you can claim is capped based on the size of your company's PAYE/NIC liability in the financial year you're claiming for. This cap is different from the PAYE/NIC cap that affects SME claims.

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