Research and Development Expenditure Credit (RDEC) Scheme

What is the RDEC scheme?

The RDEC scheme is an incentive provided by the UK government to encourage companies to undertake innovation and development activities by rewarding them with a taxable grant-like credit. The relief is based on the research and development costs that your company incurs. You may qualify for the scheme if you fall under one of the following conditions:

• 500+ employees
• €100 million turnover
• €86 million balance sheet

RDEC can also 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.

What are the benefits of claiming RDEC?

An RDEC claim is worth 20% of your qualifying expenditure (this rate applies to expenditure incurred on or after 1 April 2023). However, because the rate is paid net of corporation tax, the rate is effectively 16% taxable credit with earnings before interest and taxes (EBIT) impact. The benefit will be the same for profitable and loss-making businesses.

What costs qualify for RDEC?

The following costs may qualify for RDEC relief:

• Employee costs - directly or indirectly involved in R&D
• Agency staff - costs for those directly or indirectly involved in R&D
• Hosting and data costs related to the R&D project 
• Utilities - fuel, power, or water
• Materials and consumables - items used in the R&D project
• Software - used by the R&D team
• A limited amount of subcontracted R&D expenditure. This will include payments to universities, individuals, or partnerships

From 2024, agency staff and subcontractor costs incurred overseas will be restricted and claims will only be allowed in exceptional circumstances. However, these changes remove the restrictions on claiming subcontracted costs and the scheme will move to rewarding the company initiating the R&D.

Accounting for RDEC

You can make a claim up to two years after the end of the accounting period it relates to.

You can claim the credit by entering your expenditure into the full Company Tax Return form (CT600). However, as the claim is above the line, this credit will appear as other income in your accounts. This will have the benefit of improving the profitability of your business or business unit making a claim. 

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

The accounting and tax treatment of an RDEC claim can be complex and this is where having an R&D tax advisor who can cover both the tax and accounting policy implications is important.

How you will receive your RDEC tax credit

Seven steps must be taken to determine how you will receive your claim:

1. The credit discharges any corporation tax liability of the claimant company for the accounting period.
2. This step restricts the potential payable element and ensures that loss makers receive the same net benefit as profit makers (the credit being taxable). This is achieved by retaining a ‘notional’ tax such that the total cash benefit for all claimants is equal to the expenditure credit, net of tax at the main rate of corporation tax. The ‘notional’ tax retained under this step is carried forward and available to reduce the corporation tax liability of a later period of that company
3. This step further restricts any payable element to the company’s total expenditure on R&D workers’ PAYE and NIC for the accounting period.
4. Any amount remaining after step 3 is used to discharge any outstanding corporation tax liabilities (due but not settled) of the company for any other accounting periods.
5. If the company is a member of a group, it may surrender the whole or any part remaining after step 4 to any other group member. The company will need to fill in a template to record group relief paid to ensure HMRC can track these after PBT adjustments.
6. Any amount remaining after step 5 is used to discharge any other liability of the company to pay a sum to the Commissioners, for example, VAT or liabilities under any contract settlement.
7. The final amount remaining is payable to the company provided that the company is a going concern. If the company is not a going concern it is possible to offset PAYE or VAT liabilities before the entity is wound up. 

Most companies will either discharge their corporation tax liabilities in step 2 or obtain a cashback in step seven. However, HMRC has seen issues with discharging other liabilities or using the claim for group relief and this has brought about an extra form within the tax return (CT600L) to track these movements. Our team has followed the development of this form within HMRC and can advise companies on how to make an accurate and successful submission. 

How we work with you

Our team at Buzzacott has extensive experience with preparing and submitting RDEC claims. We can help you through the whole claim process or certain aspects of the claim, and if you’re an SME whether you qualify for the scheme for funded work. The claim submission process is complex and mistakes are made. We offer a free review of claims to check for errors and identify improvements to the submission documentations. 

Your claims will be prepared by our in‐house team of dedicated R&D tax specialists with a range of technical backgrounds. By training our staff, this allows us to maintain the quality and consistency of the claims produced, and to bring in specialists with the right skill sets to support our clients. All our specialists continue their training as they build their careers at Buzzacott. Our claims are part of our regulated services so you can be confident of the quality and standards of the work provided.

If you would like to speak to one of our R&D experts to find out more about how we can help, please get in touch via the form below or call +44 (0)20 7710 3330.

RDEC scheme FAQs

Who is eligible for the RDEC scheme? 

To be eligible under the RDEC scheme, you need to be classified as a large company, which will be subject to corporation tax in the UK. However, the company must also be carrying out eligible R&D activities in the UK, undertaking R&D that is directly related to the trade. 

Can SMEs claim under the RDEC scheme? 

Yes, Small and medium-sized enterprises can claim under the RDEC scheme if they are ineligible to submit under the SME scheme. For example, an SME that receives grant funding or subsidised state aid can apply under the RDEC scheme. 

Can I claim under the RDEC scheme if I am not paying corporation tax? 

Yes, your company can claim under the RDEC scheme if you're not paying corporation tax. You may be able to claim the tax credit against another tax liability or a tax liability within a group company. However, if you don't have any taxable profits to offset, the credit will automatically convert into a cash payment. 

Is there a deadline for claiming RDEC?

You can make a claim under the RDEC scheme for up to two years after the end of the accounting period in which you incurred the qualifying R&D expenditure. For example, if your accounting period ends on 31 March 2023, you can make a claim for RDEC tax relief on qualifying R&D expenditure incurred between 1 April 2023 and 31 March 2025.

Is there a cap on the amount of RDEC that can be claimed? 

The payment of the RDEC cash credit is subject to a cap based on the PAYE and NIC paid to HMRC in the claim period. Remaining cash credits in excess of the cap can be carried forward for use in future periods. 

Benefits of claiming under the RDEC scheme? 

Submitting a successful RDEC claim can reduce a company’s tax liability, improve cashflow, and boost innovation. The RDEC is accounted for above-the-line in the income statement, which can provide a positive impact on the profitability of your accounts and ultimately increase stakeholder investment in R&D by improving measures such as EBITDA. 

Can you claim money spent on subcontractors for an RDEC claim?

Unlike the SME scheme, money spent on subcontractors does not normally qualify for relief under the RDEC scheme. However, this may change in the future, and it’s worth keeping up to date with proposals for a new merged scheme coming in from 1 April 2024.

How do you receive the RDEC credit? 

The RDEC scheme is designed so that both loss-making and profit-making companies receive the same RDEC credit. Therefore, the RDEC benefit is subject to corporation tax. The benefit you receive will reduce your corporation tax liability.  

Can I claim RDEC if my company is part of a group company? 

Yes, in fact, the RDEC scheme offers benefits to companies within a group. As part of the seven RDEC steps, you can elect whether to surrender a proportion of the RDEC credit to other group members to offset against their tax liability, subject to certain conditions and reporting requirements. However, as this is a post-tax adjustment, care is needed when calculating QUIPs payments.

Is the RDEC scheme subject to change or updates?

Yes, government policies and tax regulations have regularly changed when it comes to research and development. It’s important to stay up to date on any legislation changes that may affect the RDEC scheme, and Buzzacott will provide up-to-date information on any upcoming changes to the scheme. 

Is there a minimum expenditure threshold for RDEC claims? 

There is no minimum expenditure threshold for RDEC claims, but the size and nature of your R&D activities will determine the credit amount.

Can an SME claim both RDEC and SME benefits for the same project? 

While an SME can claim under both the RDEC and SME scheme for the same project, the incurred costs cannot be claimed under both schemes. Expenditure must be categorised separately to determine eligibility and choose the most suitable scheme for each specific R&D project.

Do I need professional assistance to claim RDEC? 

While you do not need a specialist to claim RDEC tax relief, we find that many claimants are unaware of what projects and expenditure types are eligible, and we also see mistakes in claims. As a result, your claim may be missing expenditure that could rightfully be claimed, or it may include costs that aren’t qualifying, which could mean risking an HMRC enquiry into your claim. Therefore, having your claim reviewed by an independent regulated firm, such as Buzzacott, could be of significant benefit. 

How do I calculate RDEC? 

We’ve provided a dedicated page for calculating RDEC claims to estimate your RDEC benefit. Our R&D calculator isn't a substitute for professional advice, so get in touch with our R&D experts to receive an accurate estimate.