Please note the figures and calculations in this article are now out of date following the 1 April 2023 changes and are in the process of being updated
Research and Development Expenditure Credit (RDEC) has two main benefits. First, it can be accounted for above-the-line in your profit-and-loss account, providing a positive impact on visible profitability in your accounts. And second, if you have no tax liability, you can potentially receive a cash credit from HMRC.
RDEC (Research and Development Expenditure Credit) was originally announced as an above-the-line tax credit. It was introduced to make research and development (R&D) tax credits more visible for large companies in their company accounts and to provide a cash benefit for loss-making businesses.
Impact on R&D investment decisions
R&D tax incentives exist to encourage private-sector investment in innovation.
RDEC is independent of your company’s tax position, so the benefit you are likely to receive is easier to forecast. In this way, it provides far greater stability compared to the previous large company and SME schemes. This makes it easier for companies to factor R&D relief into their investment decisions.
Before RDEC was introduced, there was a concern that the large company incentive was not having a positive impact on R&D decision making. This was because the previous large company scheme did not affect visible profitability.
As an above-the-line credit, the contemporary RDEC scheme helps achieve the government’s policy objective. It has a positive impact on profit before tax and is therefore more visible to those stakeholders making decisions about R&D investment.
Large loss-making companies can now claim R&D tax credits
Under the former large company scheme (defunct as of 1 April 2016), you could enhance your R&D expenditure, reducing taxable profit or creating/increasing a tax loss. Unless you could utilise this loss against other profits (e.g. of a prior period or another company in your group), there would have been no immediate cash benefit to you in claiming R&D tax credits. RDEC addressed this by introducing a payable credit for loss-making companies, subject to certain conditions.
How is RDEC calculated?
RDEC is calculated as a percentage of your qualifying R&D expenditure (15% for expenditure incurred on or after 1 April 2023). This amount can then be offset against your corporation tax liability in the period. After this, there are various caps and offsets which are applied before a cash amount can be claimed.
How much can I claim?
Although your exact return will depend on the qualifying R&D activities and costs that our expert chartered tax advisers identify, you can estimate the value of your RDEC R&D tax credit by answering just a few quick questions.
A predictable R&D tax credit benefit
A key benefit of RDEC in relation to R&D tax credits is that RDEC is more independent of your tax position. An enhanced expenditure relief (like the old large company scheme, and the current SME R&D tax credit scheme), affects your taxable profit or loss – before any loss-reliefs have been taken into account.
For example, imagine you make a profit in the period, but offset this profit with losses brought forward from last period so that your net taxable profit and tax liability are both nil. If you make an R&D tax credit claim, the claim enhancement would reduce your profit for that period, before deducting any losses. Imagine the R&D claim reduces the profit to nil. Then none of the losses are needed. The only benefit you would have is an increase to the losses you have available to carry forward to future periods.
This relationship means that your benefit rate (or return on investment) under the SME R&D tax credit scheme can fluctuate year-on-year; even if your R&D expenditure remains consistent. This makes it harder for you to factor the R&D tax credit claim benefit into your investment decisions. RDEC is independent of a company’s tax position so its benefits are more predictable.
The benefits of the RDEC scheme are especially noteworthy for large companies. But they should also be considered by SMEs with grants or subcontracted R&D who previously disregarded a large company claim due to there being no immediate cash benefit.
ForrestBrown specialise in helping companies make the most of government R&D tax incentives – whether that be helping large companies with RDEC claims or SME companies with claiming under the SME R&D tax credit scheme. Our award-winning approach is robust enough to stand close scrutiny from HMRC, and adaptable enough to be tailored to our clients, whatever their size, sector, or structure.
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