Everything you need to know
Research and Development Expenditure Credit
Learn more about RDEC
The scheme was introduced in order to reward innovative companies on their inventions and encourage companies to keep investing in R&D.
Your company can either qualify until the SME incentive or the RDEC scheme for your R&D activity, but the size of your company will determine which one you qualify for. Keep reading to find out!
RDEC used to be called the large company scheme. This is for the large multi-national corporations within the economic space of the UK. It’s also now more inclusive than the Large Company Scheme as large companies who are operating in a loss may also claim.
Contrary to popular belief, size does indeed matter here. The SME scheme covers all businesses that meet the following criteria;
- Fewer than 500 employees OR,
- A turnover less than €100 million OR,
- A balance sheet less than €86 million
All other companies will fall under the RDEC initiative.
Can I Go Back To The SME Scheme If I've Claimed RDEC Rate Before?
Once a large company has opted to claim under R&D Tax Credits RDEC for the first time, it has permanently elected into RDEC and cannot revert to any other type of claim.
But on the bright side- SMEs who start to claim R&D Tax Credits can keep claiming this for the five-year period, and look to claim RDEC on expenditure that doesn’t attract SME relief when they hit the qualifying criteria- e.g. If the project receives notified State Aid.
Does Qualifying Expenditure Change Under RDEC?
Simply put? For the most part; no. The process for identifying what you can claim for both schemes remains unchanged. The difference is in the prospective total claim value (TCV) that you can claim back.
An exception to this is around subcontracted workers. Commissioned subcontracted work cannot be claimed under the RDEC initiative, but as a side note, Externally Provided Workers can still be claimed so get creative with your Workforce Plan and the amount able to be recovered is slightly higher. So getting a good specialist to navigate this is key, give us a call and we can calculate the best RDEC rate for you based on your expenditure.
How Do The Calculations Differ From The SME And RDEC Rates?
- In the SME scheme, the tax credit is given to the business by artificially creating an additional “enhancement” to the R&D spend, and either deducting that from profit (thus reducing tax) or surrendering it in exchange for cash.
- In the Large Company scheme, the same mechanism was used, but the enhancement was smaller (30% vs 130%); it is not possible to surrender the enhancement if the company was not profitable.
Both of those happen “below the line” – i.e. they are calculations that are applied to the entire company’s profit or loss, and do not impact the company’s P&L report, only its tax situation.
RDEC is a game changer. Previously, it was known as “Above The Line”- you may have heard it called ATL before. The reason is that the RDEC scheme operates “above the line” where profit and loss (and therefore tax) is calculated. Because of this it’s intended to directly impact the expense calculations for the specific departments that do the R&D – thus incentivising R&D spend in large companies where, under the Large Company Scheme, R&D Tax Credits would otherwise have ended up too distant from the engineering teams to have any impact on them.
The RDEC Rate
The RDEC rate credit amount was calculated as 12% of the company’s qualifying expenses. It has changed since then, and companies can now claim up to 13%.
The SME scheme is roughly 30% – up to 33p on every £1 spent.
This can get fairly complex, that is why we always recommend consulting with experts like ourselves. With our knowledge and partnerships, we can put the most comprehensive claim through regardless of the scheme.
How Does Counting King Handle My Claim?
The process is simple:
We will always conduct a discovery meeting to talk you through the incentive, explain our process, and establish whether your company carried out eligible research and development activity.
During the second stage, we will visit your site and conduct informal interviews with key personnel to gain a deeper understand of the business for the technical report. We will also ask for your up-to-date financial data for our in-house analysis.
We will conduct our research and development benefit analysis, where we assess all eligible costs and calculate your maximum benefit.
We will submit your claim to HMRC within 2 weeks of securing all completed documents. HMRC will process your payable credit claim and pay out the benefit within 28 days. In the case of HMRC requiring additional information, Counting King will oversee this process.
- Creating new products, processes or services.
- Developing a prototype.
- Developing or improving existing software/prototype and/or service.
R&D Tax Credits stands for Research and Development. It is a government incentive that was introduced in 2000 by the government, to encourage companies to invest in Research and Development to stay competitive on the market.
It allows companies to reduce their tax bill or claim payable cash credits that should be re-invested into Research and Development.
- By the HMRC definition, Research and Development activities that qualify must work towards the advancement of science or technology.
- This includes, but is not limited to: utilising technology, improving existing products, software advancement/development, integrating existing components in brand new solutions.
This depends on multiple factors.
If you are claiming under the SME incentive, then you are eligible to claim anywhere between 15% and 33% for your qualifying costs. This is determined by factors such as turnover and staff count.
If you are a large company, then you will qualify under the RDEC scheme, and you’ll be able to claim 13% of your qualifying expenditure. This benefit will be in the form of tax credits.
In theory, HMRC will process your Research and Development Tax Credits claim within 28 working days. However, this can vary based on peak periods, workloads and resource availability.
If you decide to use Counting King for your Research and Development Tax Credits claim, we will submit all documentation to HMRC within 2 weeks of receiving all relevant information from you.
You can claim Research and Development Tax Credits for up to 2 years after the accounting period has ended for the time it is associated with.
Counting King R&D Tax Credit
We highly recommend that your company makes the most of the ‘HMRC’, the UK Government’s incentives, and the grants for Research and Development. This really should be an easy decision for every UK company or business. The incentives will provide a welcome cash injection to your business or a reduction in your tax burden.
There is a two-year deadline for an R&D Tax credit claim. This means you have a window; if this is your first year claiming or you didn’t know about this incentive previously you can go backward and claim for the previous year also.
To learn more about this incentive read through the Counting King R&D Tax Credit Brochure.