The Research and Development Expenditure Credit (RDEC) is a UK government-backed tax incentive designed to encourage businesses to invest in research and development (R&D). By rewarding companies that undertake innovative projects, RDEC allows them to claim a credit for qualifying expenditure, reducing the overall tax burden or, in certain circumstances, providing a payable cash benefit. While traditionally aimed at large companies, certain small and medium-sized enterprises (SMEs) may also access RDEC when other SME specific R&D incentives are unavailable.
RDEC Scheme
There are currently two versions of the RDEC incentive. Which one is applicable depends on the accounting period for which a company wishes to make a claim:
- For accounting periods starting on or after 1 April 2024, a merged scheme for R&D tax relief will apply to all companies, with a separate, more generous scheme for loss-making R&D-intensive SMEs. While similar to the original RDEC, the merged scheme introduces material differences in rules and benefits.
- For accounting periods starting before 1 April 2024, RDEC continues to be available primarily for large companies and certain SMEs who are ineligible for the SME incentive due to contracted out or subsidised R&D.
This article explains the features of both RDEC schemes, including the applicable credit rates, qualifying activities, and expenditure. It also provides guidance for large companies and SMEs on how to claim RDEC effectively and how professional support, such as that offered by Lera Accountancy, can help ensure a robust claim.
Understanding RDEC
RDEC is available to UK companies that are liable for Corporation Tax and that carry out qualifying R&D activities. Unlike SMEs, which generally access the SME R&D tax credit due to its higher credit rate and broader base of eligible expenditure, larger companies or SMEs in specific situations must claim via RDEC. SMEs may need to use RDEC if they are involved in contracted out R&D, receive subsidized funding that disqualifies them from the SME scheme, or are otherwise unable to claim the SME credit due to eligibility restrictions.
From 1 April 2024, RDEC will merge with the SME incentive to form a single, streamlined scheme for all companies, accompanied by a separate relief for loss-making R&D-intensive SMEs.
RDEC for Accounting Periods Starting on or After 1 April 2024
Under the merged scheme applicable from 1 April 2024, all companies whether SMEs or large can make an R&D claim using the RDEC framework. The mechanics are similar to the original RDEC, but there are notable changes in rates, rules, and the net benefit of the relief.
- RDEC Tax Credit Rate: 20% of qualifying R&D expenditure.
- Tax Treatment: The credit is taxable at the Corporation Tax rate, which could be 19% or 25% depending on taxable profits.
- Net Benefit:
- 15% for companies paying Corporation Tax at 25%.
- 16.2% for loss-making companies or those paying 19%.
- Between 14.7% and 15% for companies receiving marginal relief.
This translates to a return of approximately 14.7p to 16.2p for every £1 spent on qualifying R&D, either as a tax reduction or cash credit.
Key Changes in the Merged Scheme
- Overseas R&D: Costs for subcontractors or externally provided workers (EPWs) overseas can no longer be included, except in limited cases.
- Contracted-Out R&D: Companies can include costs where R&D is subcontracted to another party, subject to specific legislation. Professional guidance is essential to determine eligibility.
RDEC for Accounting Periods Ending on or After 1 April 2023
For periods ending on or after 1 April 2023, the RDEC rate increased from 13 percent to 20 percent , with the same taxable treatment under Corporation Tax (19% or 25%).
Transitional Rules: If an accounting period straddles 1 April 2023, expenditure before this date qualifies at 13 percent , and expenditure on or after qualifies at 20 percent. Corporation Tax rates similarly differ depending on the expenditure period, meaning the net benefit may vary based on profits and the accounting reference
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Benefits of RDEC
RDEC offers several advantages:
- Above-the-Line Accounting: The credit can be reported in the income statement as “other income,” improving reported profitability and making R&D investment more visible to stakeholders.
- Predictable Benefit: As the credit is independent of taxable profits, it provides stable, forecastable cash flow. This stability encourages long-term investment in R&D.
- Improved Net Benefit Under Merged Scheme: From 1 April 2024, the net benefit of RDEC has increased, with effective rates rising to 16.2 percent for loss-making companies and 15 percent for main-rate taxpayers.
RDEC Rate
The RDEC rate has evolved over recent years, reflecting adjustments in government policy and Corporation Tax rates.
- Up to March 2023, the RDEC rate was 13 percent. After accounting for Corporation Tax at 19 percent, the effective net benefit was 10.53 percent per £1 of qualifying expenditure.
- From 1 April 2023, the gross rate increased to 20 percent, with effective rates ranging between 15 percent and 16.2 percent, depending on the company’s profits and applicable Corporation Tax. This rate continued under the merged scheme.
- From 1 April 2024. Loss-making companies benefit from an effective rate of 16.2 percent per £1 of R&D expenditure.
Understanding the effective rate is essential for accurately forecasting financial benefits and evaluating the return on R&D investments. Companies can use these calculations to inform strategic planning, prioritize projects, and allocate resources to maximize the value of R&D expenditure.
Qualifying Activity
The Department for Science, Innovation & Technology (DSIT) provides guidance defining activities that constitute qualifying R&D for tax purposes. These guidelines apply equally to RDEC and SME R&D tax credits and are intentionally broad, encompassing a wide variety of scientific and technological fields.
Qualifying activities typically involve resolving scientific or technological uncertainties that cannot be easily resolved by competent professionals in the field. Companies engaged in the development of new products, processes, or services or improvements to existing offerings may be undertaking qualifying R&D. Projects that involve technical challenges, experimentation, or problem-solving to achieve innovation are generally eligible. Companies with strong scientific or technical expertise conducting projects with inherent uncertainty are likely to meet the qualifying activity criteria.
Qualifying Expenditure
After identifying qualifying activities, companies must determine the associated costs eligible for RDEC. The categories of qualifying expenditure have been updated under the merged scheme.
Under the Merged Incentive (From 1 April 2024)
Eligible expenditure includes:
- Staff Costs: Salaries, employer NIC, pension contributions, and reimbursed business expenses.
- EPW Costs: Subject to restrictions on overseas workers.
- Subcontracted R&D: Subject to restrictions for overseas activities.
- Materials and Consumables: Items used up or transformed in the R&D process, including light, power, and heat.
- Software Costs: Licenses, data, and cloud computing.
Pre-Merged Incentive
Under the pre-merged scheme, qualifying expenditure covered similar categories, with the additional inclusion of contributions to independent R&D.
- Software (including data and cloud from 1 April 2023), and contributions to independent R&D.
Accurate identification and documentation of R&D expenditure is crucial, particularly for companies with significant R&D spend. Engaging expert advisers ensures that claims are maximized and compliant.
Calculation of RDEC
Calculating RDEC depends on the accounting period and the company’s tax position. Under the merged scheme, a company with £500,000 of qualifying R&D expenditure paying the main Corporation Tax rate would calculate a gross credit of £100,000 at 20 percent. After deducting 25 percent Corporation Tax, the net benefit would be £75,000 resulting in an effective rate of 15 percent.
From 1 April 2024 (Main-Rate Taxpayer):
- £500,000 × 20% = £100,000 (gross)
- Minus 25% CT = £75,000 net → 15% effective rate
For a loss-making company, the same expenditure would result in a net benefit of £81,000, or 16.2 percent.
Loss-Making Company:
- £500,000 × 20% = £100,000
- Minus 19% CT = £81,000 net → 16.2% effective rate
Prior to April 2023, the gross credit rate of 13 percent resulted in a net benefit of 10.53 percent after 19 percent Corporation Tax.
Pre-1 April 2023 Example:
- £500,000 × 13% = £65,000
- Minus 19% CT = £52,650 → 10.53% effective rate
These examples illustrate the impact of changes in RDEC rates and Corporation Tax on the net benefit received by companies.
Accounting Treatment
RDEC credits may be recognized above the line in the income statement as ‘other income.’ This approach enhances visibility and demonstrates the financial impact of R&D investment.
The precise accounting treatment depends on the timing of the RDEC claim and the company’s ability to reliably measure qualifying expenditure. Regardless of presentation, the credit is taxable income and must be accounted for in compliance with accounting standards.
Companies should involve accountants, auditors, and R&D tax advisers in determining the appropriate treatment to ensure consistency and accuracy.
Grants and Subsidies affecting RDEC
A common misconception is that receiving grants prevents a company from claiming RDEC. In fact, grants may restrict SME R&D tax credit eligibility but do not preclude a claim under RDEC.
Under the merged scheme effective from 1 April 2024, grants and subsidies no longer affect the RDEC claim. Companies should assess the structure of any grants received to determine the optimal route for claiming R&D relief and ensure compliance with both RDEC and SME rules.
Making an RDEC Claim as an SME
SMEs should first consider the SME R&D tax credit due to its higher rates and broader eligibility. Where SMEs are ineligible, RDEC provides a viable alternative. Companies should assess their business structure, grant funding, and loss-making status to determine the optimal route for claiming R&D relief. Loss making SMEs should also evaluate eligibility for the R&D-intensive SME scheme alongside the merged RDEC to ensure full utilization of available reliefs. Careful planning, accurate documentation, and professional advice are critical to maximize the benefit of R&D expenditure and ensure compliance.
This comprehensive guide outlines the key aspects of RDEC, from qualifying activities and expenditures to calculation, accounting treatment, and strategic considerations for both large companies and SMEs. Understanding the nuances of the scheme, especially under the merged structure effective from 1 April 2024, enables companies to optimize their investment in R&D and secure the maximum available benefit.
How We Can Help
Our specialist R&D team works closely with your technical and finance teams to evaluate your projects and determine whether they qualify for RDEC expenditure credit. We assist in compiling, testing, and validating all relevant cost data, ensuring your claim is accurate, compliant, and optimized for success.
We also handle the preparation and submission of all required HMRC forms— including the claim notification so you can focus on innovation while we manage the compliance process. Get in touch with our team for expert guidance on preparing and submitting your R&D claims efficiently and effectively.
FAQs
Does the size of my business matter?
This only matters when determining which of two schemes you can use for accounting periods starting before April 1, 2024. The first, the SME scheme, is designed for start-ups and businesses with fewer than 500 employees and a turnover below £83 million. The second, the RDEC scheme, applies to larger companies those with over 500 employees or a turnover exceeding £83 million.
For accounting periods starting on or after April 1, 2024, all companies, regardless of size, can claim under the Merged scheme, provided they have conducted qualifying R&D activities.
What supporting documents do i need on my corporation tax return for R&D tax claim?
In addition to the CT600, you are required to submit:
A detailed technical report outlining how your work satisfies HMRC’s R&D criteria.
An Additional Information Form (AIF), which must be submitted online separately before the CT600 for all claims from August 2023 onwards.
A Claim Notification Form, if you are a new claimant or have not submitted a claim in the past three years.
Can i submit my R&D tax credits claim after my corporation tax return has been filled?
The CT600 is the official form used to submit your R&D tax relief claim. Without it, HMRC cannot process any tax reduction or issue a cash credit.
You will however be able to submit an amended tax return to include the R&D tax claim within 24 months of your corporation tax return deadline.
How will HMRC pay my R&D tax claim?
How your R&D tax credit is paid depends on your company’s financial situation and the R&D scheme you are claiming under.
Profitable companies: The relief usually comes as a reduction in Corporation Tax, lowering the amount you owe for that financial year. In other words, you pay less tax than you would have without the claim.
Loss-making or low-profit companies: You may be able to surrender your losses in exchange for a cash credit from HMRC. This can be especially valuable for early stage businesses investing heavily in innovation but not yet generating profits.
Essential Guide to the R&D Additional Information Form for Small Businesses