R&D Tax Credits claim

RDEC (research and development expenditure credit) claims

This article explains how the RDEC scheme works, what you can claim for and how we can help.

Think your company qualifies for the SME R&D tax relief scheme instead? Head over to our guide to the SME scheme and find how we can help.

What is an RDEC tax credit?

The Research and Development Expenditure Credit (RDEC) scheme, is one of two R&D tax credit incentives offered by the UK government for companies investing in research and development.

As of April 2023, the method for calculating the RDEC rate has changed. For expenditure incurred on or after 1 April 2023, the RDEC rate has increased from 13% to 20%. The amount you get is taxable as trading income.

When to claim under the RDEC scheme?

The RDEC scheme is intended for larger businesses, if a company is a large UK company, with 500+ employees and either €100 million turnover or €86 million gross assets, it must claim under an RDEC scheme.

Alternatively, where small companies have received "notified state aid" for their projects (e.g., InnovateUK), they may need to claim either partly or fully through the RDEC scheme.

Not all government grants are necessarily State aids, and funding under some schemes may or may not be State aid depending on the circumstances. We’d recommend checking directly with the scheme / grant provider to confirm this.

How to demonstrate Qualifying Activity for RDEC?

Both RDEC and SME claims are reviewed under the same BEIS guidelines for qualifying activity and expenditure.

In order to apply for tax relief through the RDEC scheme, you need to provide a Technical Narrative that demonstrates how your project meets the following criteria:

  • Your project aims to make an advance in a field of science or technology.
  • Your project involves working to overcome technological or scientific uncertainty. This means that in seeking the advance, your competent professionals encountered technological uncertainties for which the resolution was not readily deducible.
  • You have made efforts to overcome the uncertainty through iterative testing, and redevelopment. In the Technical Narrative, you should detail the iterative process in overcoming the uncertainty, including both successful and unsuccessful attempts.

The categories for qualifying expenditure are:

  • Staff costs, including salaries, employer’s NIC, employer’s pension contributions, bonuses and any reimbursed ‘out of pocket’ expenses
  • Externally Provided Workers (EPWs) (e.g. agency workers)
  • Subcontractor costs not including limited companies  (e.g. charities, individuals, higher education institutes, scientific research organisations).
  • Consumables and utilities (light, power and heat used up or transformed in the process of the project) – this also includes any test materials and prototypes.
  • Software costs (e.g. CAD, CAM, Atlassian)
  • Cloud Computing costs (for claims on or after 1 April 2023)
  • Data licence costs (for claims on or after 1 April 2023)
  • Money paid to clinical trial volunteers.

How is RDEC applied?

If your company is profit-making, then RDEC will be used to reduce your corporation tax liability. If your company is loss making, then you will receive RDEC as a payable cash credit.

RDEC 7 steps – how to apply your R&D tax credit

When generating your technical narrative, our platform will apply the following steps in this order to set out your tax credit in your company tax return:

1.     Discharge corporation tax liability for the claim period

Reduce your corporation tax for the accounting period for which you are making the R&D claim by the gross amount of your RDEC tax credit.

2.     Adjust to the net amount of corporation tax.

To ensure that profit-making and loss-making companies get the same benefit from RDEC, if the amount remaining after Step 1 exceeds the net amount of RDEC (step 1 value multiplied by the corporation tax rate), then this amount is withheld and carried forward into the next financial period.

3.    Restrict claim to the company’s PAYE/NIC liability relating to R&D staff.

If the amount of remaining RDEC exceeds the value your company spent on PAYE tax and NI contributions for your R&D workers in the accounting period of the claim, the excess credit carries over to the next accounting period.

4.    Discharge corporation tax liability for other accounting periods

Use the remaining amount to pay off any outstanding corporation tax you owe for other accounting periods.

5.    Elect whether to surrender for group relief.

If another company in your group has tax payments outstanding, you can choose to apply your company’s RDEC to offset their tax bill.

6.    Discharge any other HMRC liabilities.

If your company has other outstanding HMRC liabilities, such as VAT or PAYE, then HMRC will apply your remaining credit to settle these amounts.

7.    Cash credit is payable.

If there’s still RDEC remaining after the previous six steps, then HMRC will send you the amount in cash.

There’s more about how to apply the tax credit on the gov.uk website.

When to submit your RDEC claim to HMRC?

For accounting periods starting on or after 01 April 2023, you will need to send HMRC a ‘pre-notification’ form within 6 months of your year end. You then have 2 years from the end of the period to submit your full claim to HMRC.

For accounting periods which started before 01 April 2023, you do not need to submit a pre-notification form to HMRC but you still have 2 years from the end of the period to submit your claim to HMRC.

Get in touch with us directly to find out how we can help you with your RDEC claim.