The R&D Expenditure Credit ( also known as RDEC or the above-the-line scheme) was introduced for qualifying R&D expenditure incurred on or after 1 April 2013 and is a direct replacement for the R&D Large Company Scheme which was introduced in 2002. In the UK there are currently two schemes in operation, one for SMEs and one for non-SMEs. The quantum of relief, the business costs eligible for relief and the manner in which the relief is administered is dependent upon which of the two schemes your business qualifies for.Specifically, any company that does not qualify as an SME for R&D Tax purposes is able to claim under either the RDEC or Large Company schemes until 1 April 2016 when the Large Company Scheme will be withdrawn. Once a company moves to RDEC , it cannot revert to the Large scheme.
RDEC is applicable to SMEs where some or all of the R&D is contracted out to the SME, where the R&D is subsidised, or where the Aid Cap is exceeded. Like Large enterprises, SMEs can also choose whether to claim under the Large company scheme or RDEC when it cannot claim under the more generous R&D scheme.
Until 1 April 2013, when new legislation was introduced, Large Companies were only ever entitled to an enhanced deduction of 30% on qualifying expenditure. In 2015/16 therefore:
Profitable companies enjoyed a corporate tax saving of 6.6%; and
Losses generated under this scheme were not eligible for a tax credit.
The losses could only be carried back, group relieved or carried forward to shelter trading profits arising in future periods.
There was little advantage therefore, for loss-making Large companies that did not expect to be tax paying for the forseeable future.
In April 2013 the new Research & Development Expenditure Credit scheme (“RDEC”) was introduced for Large Companies. Such companies are now eligible for a cash credit from HMRC based upon their qualifying R&D expenditure and subject to various conditions, including a PAYE/NIC cap and there not being any outstanding tax liabilities owed to HMRC. These companies are for the first time provided with an opportunity to:
displace any corporation tax liability arising; or
receive a cash payment from HMRC; or
reduce tax or other duties that may be due to HMRC.
Although the new RDEC rules for Large Companies were introduced on 1 April 2013 and do not become mandatory until 1 April 2016, companies can elect to adopt the new rules early. However once an RDEC claim is made the company is locked in for that and subsequent accounting periods.
The tax credit, currently 11%, is calculated as a percentage of the qualifying R&D expenditure identified in a given accounting period. The credit itself is a taxable receipt for corporation tax purposes and is subsequently taken as a deduction from the overall tax liability arising in the accounting period.
In actual cash terms, the new RDEC scheme, with the existing tax credit of 11%, provides a tax saving of 8.8% in 2015/16 compared to the Large Company scheme which only equates to a 6% benefit.
The main categories of qualifying revenue expenditure that are eligible for R&D relief under the Large Companies scheme are described below.
The major difference of Large Companies compared to the SME scheme is subcontractors. Generally, Large Companies cannot include the costs of subcontracted R&D as part of a claim but can claim for where work is subcontracted to them.
The salary costs associated with employees and directors that are directly and actively engaged in R&D activities which directly contribute to resolving a technological uncertainty in science or technology are eligible for relief. Staffing costs include:
Externally Provided Workers (“EPW”)
EPWs can be broadly described as contract workers under the direction, supervision and control of the claimant company and who are not self-employed. Depending on whether an EPW is connected to the claimant company (e.g. they are an employee of the same group), different amounts can be claimed.
If unconnected, 65% of the qualifying part of payments made can be claimed, If connected, the claimant company can claim lower of:
Therefore, where companies are connected – or nominate themselves as connected, the claimant company may potentially claim up to 100% of the expenditure related to EPW’s
Consumables or transformable items
This can include anything consumed or transformed in the R&D process, including materials, wastage and the cost of building prototypes as well as:
It should be noted that where prototypes or consumables are subsequently sold on, HMRC will not accept the costs of these being claimed.
Companies undertaking clinical trials as part of a drug development program are able to claim the cost of relevant payments to the subjects of clinical trials.