Just like the R&D Tax Credits system for small and medium-sized enterprises, the Research and Development Expenditure Credit (RDEC) scheme is all about rewarding innovation. When you’re out there on the cutting edge, solving problems with wider implications than just your own business’ daily survival, the scheme wants to help you push back the boundaries for everyone.
RDEC replaced the old Large Companies R&D scheme back in 2016. Under the old system, you could claim a Corporation Tax relief rate of 130% on your qualifying costs. So, if you spent £1,000 on a project that was eligible, then the profits you’d be taxed on would be reduced by an additional £300 over what you actually spent. If you had an allowable trading loss, you could increase it by 30% of your qualifying R&D costs.
Under RDEC, you’re instead looking at a credit worth 12% of everything you’re spending on qualifying R&D. If you’re in profit, it brings down the tax you owe. If you’re making a loss, you can claim it as a cash payment.
Looking at RDEC in comparison with the SME R&D Tax Credits, you start to get a picture of how the playing field lies. SMEs making R&D claims are entitled to:
- A 230% deduction for their qualifying expenditure.
- A tax credit of up to 14.5% of their surrenderable loss if they’re not in profit.
An important difference between the two schemes is that any benefit from the RDEC scheme is TAXED, regardless of the company size or amount received back. Whereas the SME scheme truly is a tax credit and is non-taxed and below the line.
As for which scheme you qualify for, it’s not always as cut-and-dried as you’d expect. The basic requirements for the SME system are that you have fewer than 500 employees and a turnover of under €100 million (or a balance sheet of under €86 million). However, there are a few wrinkles in the rules that can leave even smaller firms claiming RDEC instead. For example, SMEs already claiming notifiable state aid or subcontracting to another company might not qualify for SME R&D Tax Credits. There are also regulations about any partner or “connected” companies involved, which can sometimes rule you out of the SME scheme.
Depending on your situation, you might find your business actually needing to swap between the two R&D systems. Maybe your employee count changed or your turnover skyrocketed, for instance. When your business steps over the SME threshold in one direction or another, you don’t necessarily need to change the status of your R&D claim immediately. In general, it’s only if you meet a scheme’s criteria for 2 years in a row that you need to switch to it. However, if your company merges or gets bought out by a larger entity, you might find yourself swapping to RDEC overnight. In fact, if this happens you’ll be a considered a large company for the whole period, not just from the moment the big change happened.
Looking at what actually qualifies as eligible R&D expenditure, the rules for RDEC should seem pretty familiar if you’ve ever claimed under the SME system. In basic terms, you can get relief for:
- Employee costs (pay, Class 1 NICs and pension contributions).
- Certain subcontractor costs (although you need to be sure they qualify).
- Consumable materials and utilities.
As with the SME scheme, the core of RDEC is a recognition that you’re solving problems and clearing up uncertainty. You’ll still be expected to prove that your projects qualify, of course. It definitely pays to be thorough in working out your eligible costs, for instance. Perhaps even more importantly, it pays to build an understanding of what R&D really is and what it means for your business into everything you do. It takes expertise and detailed attention to make the most of an RDEC claim, and far too many innovative businesses are still missing out. Talk to RIFT’s R&D experts about making your next claim, and let’s put your biggest and brightest ideas to work.