Understanding the RDEC scheme

Businesses looking to claim research and development tax credits must first establish which scheme they are eligible for. If you have identified that your activity qualifies for the relief – that is, that it seeks to overcome an uncertainty through the use of scientific or technological processes – then the next step is to identify whether your claim falls under the SME of RDEC scheme.

The SME scheme applies to businesses with under 500 employees and a turnover of less than €100m annually. If your company has more employees or a higher turnover, it falls into the R&D Expenditure Credit (RDEC) scheme. This offers a 12% credit for both profit and loss-making organisations that have engaged in R&D activity. Let’s take a look at the RDEC scheme in more detail.

How much can I claim?

As of 1 January 2018, the RDEC rate is 12%, so for every £1 spend on R&D activity, up to 10p (after Corporation Tax reduction) can be claimed back. The after-tax cash benefit, then, is 10%. For profitable companies, this is calculated as a reduction in the Corporation Tax payable, while loss-making organisations with no tax payable can claim the R&D tax credits as a cash benefit.

As an example, let’s assume Company A is profitable, and has spent £500,000 on research and development for this tax year.

£500,000 spend x 12% enhancement rate = £60,000 above the line credit

£60,000 – 19% CT rate (in this case £11,400) = £48,600

The after-tax benefit in this example, then is £48,600.

What are the qualifying costs?

R&D tax credits can only be claimed on so-called qualifying costs. These are expenses directly associated with the project and can include:

• Employee costs, including wages NI contributions and pension payments
• Consumables and utilities
• Certain software costs
• Payment of clinical trial volunteers

This list is not exhaustive so speak to your tax advisor for full details on which costs you can claim for.

In terms of timescales, you can claim for any of the above expenditure from the moment your business began work on resolving the particular scientific or technological uncertainty you are seeking a solution to. At this point, you should already have identified the problem and confirmed that there is no current, viable solution.

You must stop claiming for the tax relief once a working prototype the solves the issue is developed, or until you cease to work on the project.

Making a claim

A claim for R&D tax relief is made as a part of Corporation Tax return submission. Once you have gathered and totalled the qualifying expenditure, this is used as in the example above to calculate the credit you’re owed. It’s also advisable to submit documents to evidence the nature of your work and how the challenges were overcome alongside the calculations.

To ensure your claim is accurate, enlist the help of a tax specialist when making your calculations and submitting your Corporation Tax return. This ensures no accidental errors are made and that you receive the full amount of relief owed to you.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.