Introduction

Formerly known as the “above the line” large company scheme, the Research & Development Expenditure Credit (RDEC) is the lesser known R&D scheme. Although mostly claimed by larger companies, it is quite possible that an SME may find themselves making a claim under certain conditions too.

Eligibility

Generally speaking, any UK company that doesn’t meet the definition of an SME (see here) will qualify for RDEC.

Companies that qualify for RDEC may have:

  • More than 500 employees, or a turnover greater than €100m and / or a balance sheet value in excess of €86m.
  • Received some form of notified state aid, the most common example being a grant from InnovateUK.
  • Been an SME engaged as a subcontractor to a large company. For more detail on this specific case, see this article.

A claim can be made at any time up to two years after the end of the “accounting period” – usually the company year end. Note that it doesn’t matter if you already submitted a corporation tax return – you can re-submit at any time up to the deadline.

Note that claims are made on a project by project basis, so it is possible that an SME could claim both types of tax credits in the same year.

Qualifying Projects

The definition of qualifying R&D is largely the same for both tax credit schemes, and is assessed on a project by project basis. That leads to the rather obvious point that a business must have set out from the start to achieve its “advance”.

In addition:

  • You must be trying to achieve an “advance” using science or technology. Advance is left quite vague given the huge range of possible work, but this generally means something that would be recognised as an appreciable improvement by a competent professional in the field.
  • The advance will have been achieved via the resolution of uncertainty.
  • The advance should not be “readily deducible” by a competent professional in the field, and correspondingly it is expected that the work be conducted by suitably qualified professionals.

Qualifying Costs

To qualify, your costs must fall into one of several HMRC defined categories:

  • Employee costs, e.g. Salaries, NI and pension contributions.
  • Software (if used for the R&D).
  • Consumable items.
  • Clinical trials volunteers.

Obviously we’ve glossed over a lot of detail here, but some notable exclusions are:

  • Subcontractor costs – this is one of the major differences between the SME and RDEC schemes.
  • Overheads such as rent, rates or land costs
  • Capital expenditure (although some other reliefs may apply)
  • IP costs (e.g. patents & trademarks)
  • Dividends

The Value of a Claim

Once you have analysed your costs, the RDEC calculation involves taking 12% of the total costs (11% before 2018) and add this to the trading revenue figure for the period.

For a profitable company this credit has the effect of increasing the taxable profit figure. The next step is then “spend” this credit against the calculated tax bill (which includes a bit of extra tax on the credit itself of course).

If there is any credit left unused it can be carried back against the previous period’s tax bill, or carried forward against future bills. The overall saving is equivalent to about 9% of your R&D costs (vs about £25% for the SME scheme).

One other option is to convert any remaining credit into a cash payment. As with the SME scheme, this is usually where the company has made a loss during the year. To qualify for a cash payment, there are a couple of extra steps to consider first:

  1. The gross amount of RDEC credit needs to be reduced by an amount equivalent to the corporation tax rate. This is to ensure that both profitable and loss-making companies receive the same amount of benefit.
  2. Any payment is capped to the amount of employment taxes paid on behalf of the staff doing the R&D. This is not just the employer’s NI (used in the initial calculation) but also employee PAYE and NI amounts. This can prove a problem for start-ups running without many direct staff.
  3. As with other credit repayments, HMRC will deduct anything else you owe them before actually sending you the money.

How To Claim

Claims are made via the annual CT600 tax return, and will generally require a detailed report for HMRC explaining the nature of the R&D and how the costs have been calculated. Naturally this is where WOCO comes in, handling the whole process for you. If you’d like to chat through whether you might have a claim, get in touch here.