Research and development expenditure credit (RDEC) can reduce your tax bill if your company carries out qualifying research and development. RDEC is usually claimed by larger companies, but can also be claimed by smaller companies if an R&D project is not eligible for the small companies tax credit scheme
RDEC qualifying criteria
There are two tax credit schemes for research and development: RDEC, which is usually claimed by larger companies, and research and development tax credits for SMEs (small and medium-sized enterprises).
Both RDEC and SME tax credits are only available if your business is a UK limited company. You can claim tax credits whether your company is profitable or loss-making.
The criteria used to determine whether an R&D project is eligible for a tax credit are the same for both schemes. Broadly speaking, you need to be working on a project that aims to make a scientific or technological advance, and where there is real uncertainty about whether this will be possible or how you will do it.
You can find more guidance in our overview of research and development tax relief.
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RDEC for smaller companies
If your company carries out qualifying R&D, you will normally want to claim SME tax credits, as these are more generous than RDEC.
But you will need to claim RDEC instead if:
- Your company does not qualify as an SME. To qualify, you must have fewer than 500 employees. You must also have turnover below ?100 million or total assets below ?86 million.
- Your company is part of a group which has a total size over the SME thresholds. This can also apply if you have partnerships with other companies involving more than 25% of voting rights or capital, where the sum total of your size would be above the SME thresholds.
- You are working as a subcontractor to a large company. You cannot usually claim either RDEC or SME tax credits for work done as a subcontractor to another small company or to a business which is not a limited company.
- Your project is receiving 'notifiable state aid' - typically government-funded grants or subsidies worth more than ?200,000 over three years.
- You want to claim for R&D costs which are already being subsidised by any form of grant or subsidy.
RDEC rates and calculation
From 1 April 2015, RDEC offered a taxable credit worth 11% of qualifying expenditure. From 1 January 2018, the RDEC rate increased to 12%. The RDEC is subject to corporation tax.
For example, suppose your accounting period runs from 1 January 2018 to 31 December 2018 and you have £100,000 of eligible research and development costs:
- Taxable credit = £100,000 x 12% = £12,000
- Corporation tax at 19% = £2,280
- Net credit = £12,000 - £2,280 = £9,720
- Value of RDEC as percentage of eligible costs = 9.7%
If your company is making its first claim, has fewer than 50 employees and turnover below £2 million, you can apply to HM Revenue & Customs (HMRC) for Advance Assurance (rather than waiting until you complete your tax return). This guarantees that your tax credit claims for the next three years will be accepted (provided they are in line with the information you have given in advance).
A pilot scheme offering advanced clearance for larger businesses was announced in the November 2017 Budget.
Steps to claiming RDEC
You can claim tax credits up to two years after the end of the accounting period you are claiming for.
- Take advice on which R&D projects and costs are eligible, and whether to claim under the SME or RDEC schemes.
- Make the claim by filing or amending your corporation tax return for the accounting period(s) covered by the project.
- Minimise the risk of delay by including an explanation of why your project qualifies, or by applying for Advance Assurance.
- Wait for HM Revenue & Customs to respond. They may ask questions to confirm details of the R&D activities and check that you have claimed the correct costs.
- Get confirmation of the tax credit.
For a profitable company, a successful claim results in an immediate reduction in your corporation tax liability. If you have already paid the tax due, you receive a refund.
If your company is loss-making, or the value of the credit exceeds your total corporation tax liability, the process is more complicated. This may lead to unused tax credit being offset against other tax liabilities (eg PAYE), carried forward to set against future corporation tax liabilities, or received as a payable net credit (after deduction of corporation tax). You should take advice from an R&D tax credit specialist.
You can find detailed guidance and worked examples of RDEC claims in the HMRC Research and development manual.