At a time when the UK Government is trying to drive internal investment within the UK, Research and Development (R&D) and Innovation remains a key part of their strategy to stimulate investment and provide a valuable incentive for businesses. The Prime Minister, Boris Johnson, recently announced plans to increase the RDEC rate from 12% to 13% which, the Tories say, “will boost manufacturing and the professional, scientific and technical services sectors in particular”.
What is the Research and Development Expenditure Credit (RDEC) scheme? The scheme allows ‘large’ companies – and certain SME’s – to reclaim R&D costs at 12% of qualifying expenditure. Note: for the purposes of the scheme, a ‘large’ company is one which employs more than 500 full-time staff and where either Turnover exceeds €100m or the Balance Sheet exceeds €86m.
Background: The RDEC scheme was introduced by the Finance Act 2013 to modify the way in which ‘large’ companies claimed R&D tax relief. Prior to this, ‘large’ companies traditionally claimed under the now-obsolete Super-Deduction scheme, which enabled them to enhance their qualifying R&D expenditure by 30% and obtain a tax refund/offset. Whilst the old legislation prohibited loss-making companies from making a claim, a major benefit of the RDEC scheme is that it allows ‘large’ loss-making companies to claim a cash credit, net of tax, to reward them for their Research and Development efforts. Furthermore, as the RDEC benefit is shown ‘above the line’, the expenditure becomes visible in the company’s year-end accounts.
SME’s may occasionally have to make an R&D claim under the RDEC legislation, specifically when finding themselves in any of the following circumstances;
- having received a Notified State Aid grant or subsidy
- having been subcontracted to carry out the R&D by a ‘large’ company
- is part of a group which, when taken as a whole, breaches the criteria to qualify them as an SME
How it works: The RDEC clam works in a similar way to the current SME scheme; it’s only the method by which the tax relief is delivered which is different.
Costs you can claim: A claim can be made for project costs incurred from the date on which you start working on the uncertainty until such time as you either develop or discover the advance, or the project is stopped.
- Direct and Indirect Staffing costs
- Externally Provided Workers (EPW’s), restricted to 65% of the payment amount
- Subcontractor costs, but only where incurred in using;
- a charity
- a higher education institute
- a scientific research organisation
- a health service body
- an individual or partnership of individuals
- Materials consumed in the R&D process
- Proportion of Heat, Light, Power and Water costs
How to apply the credit: You must complete following steps to apply RDEC:
- The credit must be used to settle your Corporation Tax liability for the accounting period, although you’ll need to pay Corporation Tax on the credit. If the credit means you are due a refund of Corporation Tax that has already been paid, the interest will be calculated on a last in, first out basis.
- If you have RDEC remaining after step 1, the amount is reduced by applying a notional tax charge based on the main rate of Corporation Tax for the accounting period. If the amount remaining after step 1 is higher than what the value of the total credit minus the notional tax charge would have been, you must use the value of the total credit minus the notional tax charge in step 3.
- The credit must not be higher than your company’s total expenditure on R&D workers’ PAYE and National Insurance contributions for the accounting period. Any amount over this will be added to any expenditure credit in the next accounting period.
- The remaining amount is used to pay any outstanding Corporation Tax liabilities for any accounting periods.
- The credit can be surrendered in whole or part to any group member, or can be used to discharge any other company liabilities, such as VAT or liabilities under a contract settlement.
- The final amount can be paid to your company.
Engaging a specialist with experience and knowledge of the RDEC legislation is vitally important and will pay dividends on the amount of relief which is claimed.
Innovation Tax will ensure you receive the optimum level of benefit, using their tailored claim methodology to compile the claim in an efficient manner which is neither onerous to the company or its staff members.