Research & Development Expenditure Credit (RDEC): A Guide for UK Business Owners

The Research and Development (R&D) Tax Credits scheme is a powerful tool for UK businesses looking to invest in innovation and growth.

However, many business owners find the process of claiming R&D tax credits to be daunting and complex, leading them to miss out on valuable financial support. That's where this blog comes in.

Our aim is to provide a simple and accessible guide to the RDEC scheme, specifically tailored for UK business owners.

We'll cover everything you need to know, including an overview of the benefits, eligibility criteria, how to claim, and common mistakes to avoid. Whether you're a small startup or a large corporation, we'll make RDEC simple for you to understand.

So, let's dive in and unlock the potential of this valuable scheme for your business.

Overview of the RDEC Tax Credit scheme

Expenditure credit is a tax credit and can be claimed if you’re either a:

• large company
• small and medium-sized enterprise (SME) and you cannot claim R&D tax relief for small and medium-sized enterprises

Whether your company makes a profit or loss, some or all of the expenditure credit may be used to settle your company’s, or other group companies’ Corporation Tax liabilities.

In some circumstances the expenditure credit can:

• be used to settle other tax liabilities your company is liable for
• lead to a payment of credit to your company

Expenditure credit rates

The expenditure credit is calculated as a percentage of your qualifying R&D expenditure, the rates (as of August 2023) are:

• 13% on expenditure incurred from 1 April 2020 up to and including 31 March 2023
• 20% on expenditure incurred from 1 April 2023

Understanding Eligible Expenditure for R&D Tax Credits

When claiming R&D tax credits, it's crucial to identify qualifying expenditures. These costs must be part of a project aimed at advancing science or technology but not in the arts, humanities, or social sciences.

Eligible Costs Include:

• Consumable Items: Claimable items used in R&D include fuel, materials, power, and water. However, costs of consumables sold or transferred are not eligible.
• Clinical Trials Volunteers: In the pharmaceutical industry, payments to clinical trial subjects are claimable.
• Independent R&D Contributions: Large companies can claim contributions to independent R&D if made to qualifying bodies, individuals, or specific firms.
• Data Licence and Cloud Computing: For periods starting 1 April 2023 onwards, data licence and cloud computing costs, including data storage, hardware facilities, operating systems, and software platforms, are eligible.
• Externally Provided Workers: Costs for workers from a staffing agency can be claimed, with varying percentages based on the company's connection to the provider.
• Staff Costs: Salaries, wages, bonuses, pension contributions, and secondary Class 1 National Insurance contributions are claimable for staff working directly on R&D projects. Certain administrative or support staff costs directly supporting a project are also eligible.
• Software Costs: Software licence fees and a portion of costs for software partly used in R&D are claimable.
• Subcontractor Costs: Eligible if undertaken by a qualifying body, individual, or specific firms.

Benefits of RDEC

The RDEC scheme has many benefits that businesses should consider. Firstly, they are an easy way to gain access to additional funding for research and development activities and can help organisations become more competitive in the market.

Not only can RDEC provide organisations with an immediate cash injection, but it also helps them to invest in innovative projects that could ultimately boost their success in the long-term.

Further advantages of claiming RDEC include large sums of money being received for each eligible project, as well as a consistent stream of money if multiple projects are claimed for. This can be extremely beneficial for businesses who need regular injections of cashflow.

This makes it ideal for companies who wish to claim relief while still having as much profit as possible available. All these benefits make RDEC R&D tax credits an attractive option for businesses when looking at ways to fund their research and development costs and make them more competitive in their industry.

Eligibility Criteria for RDEC

To apply under RDEC, companies must have:

• A staff headcount of over 500
• A turnover of €100m or more
• At least €86m in gross assets

RDEC allows bigger organisations to currently claim back 13% of their eligible R&D expenditure (the RDEC rate will increase to 20% 1st April 2023).

In fact, statistics suggest that the average RDEC claim is worth over £500,000! It’s worth remembering that SMEs can claim under RDEC in certain circumstances.

For example, if an SME has been subcontracted by another company, then RDEC will need to be used instead. RDEC will also need to be used by an SME if the R&D project has received any grant funding or subsidy not just notified state aid.

How to Claim RDEC

Businesses can claim the credit by entering your expenditure into the full Company Tax Return form (CT600).

If your claim covers a period of 12 months or more, submit a separate claim for each accounting period.

You can send more information to HMRC online to support your claim.

To support your claim online, you need a Government Gateway user ID and password. If you do not have a user ID, you can create one the first time you use the service.

Before you claim

You must follow these steps before you claim the expenditure credit, or your claim may not be valid.

1. For accounting periods beginning on or after 1 April 2023, check if you need to submit a claim notification form to notify HMRC in advance of your claim. Find out what you need to provide when you tell HMRC that you’re planning to claim R&D tax relief.

2. From 8 August 2023, you must submit an additional information form to support your claim. Find out how to send the information and what to provide when you submit detailed information before you claim R&D tax relief.

What you will need to provide to support your claim

You will need to provide a short summary that explains how your project:

• meets HMRC's definition of R&D
• looked for an advance in science or technology and aimed to achieve this advance
• had to overcome scientific or technological uncertainty, and how you did this
• could not easily be worked out by a professional in the field

If you are claiming the credit on:

• 1 to 3 projects, you must include details of all projects
• 4 or more projects, you must include detailed descriptions of at least 3 projects (up to a maximum of 10), which between them cover 50% or more of your total qualifying R&D costs

You will also need:

• the start and end dates of the accounting period relating to the R&D activity — these should be the same dates as the period covered by your CT600 return
• your Unique Taxpayer Reference (UTR) number
• details of your qualifying R&D costs

Maximising the Value of R&D Expenditure Credit: A Strategic Approach

Understanding how to effectively utilise the R&D expenditure credit is key to maximising its benefits for your company. Here's a strategic approach:

1. Initial Application: Begin by offsetting the credit against your Corporation Tax liability for the relevant accounting period. Should this result in an overpayment, interest calculations will follow the 'last in, first out' principle. If there is any expenditure credit left after settling your Corporation Tax liability go to point 2. If there is no expenditure credit left, you do not need to follow point 2 to point 7 below.
2. Managing Excess Credit: Assess any remaining credit post Corporation Tax settlement. This excess can be strategically allocated – either surrendered to a group company to offset their Corporation Tax or carried forward to mitigate future tax liabilities.
3. PAYE and National Insurance Contributions Alignment: Align the residual credit from point 2 with your R&D staff's PAYE and National Insurance contributions. This step ensures optimal use of the credit within the bounds of actual R&D personnel costs.
4. Addressing Outstanding Liabilities: Utilise any remaining credit towards settling any outstanding Corporation Tax liabilities across various accounting periods.
5. Group Collaboration: If applicable, consider surrendering part of the credit to group members, helping offset their Corporation Tax obligations.
6. Broader Liability Coverage: The expenditure credit must be applied to other company liabilities, such as VAT or contractual obligations.
7. Final Disbursement: The remaining amount, post these allocations, is then paid to your company.

Common Mistakes When Claiming RDEC

When claiming RDEC, it is important to be aware of some of the common mistakes that are made. One of the most common mistakes is not having a detailed understanding of what activities qualify for R&D spending.

To improve your chances of having your claim accepted, make sure you understand which activities are eligible and also take into account any changes in legislation affecting the scheme. Additionally, incorrect calculations or estimates can lead to delays in processing your claim due to errors in calculation. Furthermore, it is important to ensure all costs incurred during an R&D project are accurately captured as only these costs will be eligible for tax relief under the RDEC scheme.

Another mistake is failing to provide adequate evidence when filing a claim. Without sufficient supporting documentation it can be difficult for HMRC to determine whether the expenditure qualifies for relief and could result in your application being rejected.

Finally, keep good records throughout the project and make sure you understand which activities count as research and development before starting any work as this may affect how much relief you can claim at the end of the project.

By following these tips, any company should find their experience with claiming RDEC smoother and more successful!

Keeping Accurate Records for Future Reference

HMRC actually doesn’t stipulate specifically what record keeping it requires for RDEC. But a somewhat lax attitude isn’t great either.

It’s still expected that anyone making a claim will be able to demonstrate what costs it is they’re actually claiming for, and to evidence those costs.

Having said all that, HMRC does not expect claimants to have maintained records where previously there was no business requirement to do so. Exactly how records are kept is largely up the claimant, and as long as robust, real-time methodology is used then that should be fine.

To make life a bit easier, HMRC rules are clear that the R&D project itself must have sought to make an advance in science and/or technology. The time allocated to R&D by members of staff involved in must also be accurately apportioned, and the outcome of the project must not have been obvious from the start.

This blog may be useful R&D Tax Credits: What Does "Technological Or Scientific Uncertainty" Actually Mean?

The takeaway message is that although record keeping is extremely important to your R&D Tax Credits claim, the way you do it is up to you. HMRC recognises that different businesses in different sectors will have their own way of doing things, and for new claimants especially the odd gap isn’t the end of the world. The important thing is to make sure your records are as good as they can be when claiming in future.

Free Resources: Simplify Your R&D Documentation Process

Maintaining accurate records is essential for a successful R&D tax credit claim, but knowing where to start can be a challenge. To make the process easier, we’re offering two free resources designed to help you capture all the key details:

• Schedule of Qualifying Projects Template – Use this easy-to-follow template to evaluate and document each project’s eligibility, ensuring you meet HMRC’s standards.
• R&D Activities Boundary Diagram – A visual guide that helps define and organise the boundaries of claimable activities within your projects.

Download Both Tools for Free to ensure your R&D documentation is comprehensive, compliant, and ready for a successful claim.

Why choose Myriad to help with your R&D tax claim?

Myriad has been managing R&D Tax Credit claims for nearly two decades, assisting a broad range of companies up and down the country. No matter what size or sector your company is in, we can help.

We understand how important R&D Tax Credits are, both to individual companies and the wider economy as a whole. However, because the government is keen to maintain the scheme’s success, they often update the rules and regulations around these R&D tax schemes, which can get confusing. This is where we come in.

The expert team of R&D tax advisors here at Myriad Associates apply a unique methodology when navigating through the complexities of the R&D tax claims process. To secure the R&D tax relief you're eligible for, we maintain a holistic approach.

First, we’ll work to understand the technical and scientific uncertainties your project faced in order to ensure we meet HMRC's strict R&D tax credits criteria.  Then, we’ll use that information to build a robust technical report, collate all the relevant costs and calculate the benefit owed for inclusion in your company’s tax return.

We’ll also happily handle any enquiries from HMRC should they arise. The claims criteria can be difficult to understand and so enquiries are becoming a more regular occurrence as HMRC works hard to tackle abuse of the scheme.

Do you need help with an HMRC enquiry?

Has your R&D tax relief claim attracted the attention of HMRC? Don’t panic.

Enquiries into R&D tax relief claims by HMRC are on the rise. Our highly-qualified team will provide the utmost support to secure a beneficial resolution for your HMRC R&D enquiry, so that you can rest assured knowing your business is in safe hands.

We are well equipped to offer actionable advice on any R&D tax relief enquiries made by HMRC as well as provide proactive reviews that can help ensure complete peace of mind during these uncertain times.

Please visit our HMRC enquiry support service webpage for more information or if you’d simply like to know more, please do get in touch using our contact form or call our friendly team on 0207 118 6045.

Get in touch with the R&D tax relief experts at Myriad Associates

Whatever stage you’re at in your claim for R&D Tax Credits, simply contact us on 0207 118 6045 or use our contact page.

Whether you need full support from start to finish or simply have a quick question, we’re here to help.