RDEC IN FOCUS
RESEARCH DEVELOPMENT EXPENDITURE CREDIT (‘RDEC’)
The current framework - the UK is unusual in having two R&D tax relief schemes, in general applying separately to both small companies (SMEs) and larger companies. Here we focus on the ‘RDEC’ scheme, providing a snapshot of the current position and commentary on the changing landscape.
RDEC is a taxable credit available to large companies in the UK (those not defined as an SME) that incur costs related to R&D activities and to SME’s that are ineligible for the SME R&D scheme due to grants or subsidies or have been subcontracted to do the R&D work by a large company. Under the RDEC scheme, a benefit is calculated as a percentage of a company’s qualifying R&D expenditure and is delivered as an ‘above the line’ credit, taxable as trading income. Regardless of whether a company makes a profit or loss, some or all of the REDC is used to discharge its (or other group companies’) Corporation Tax liabilities.
Subject to differences with the PAYE / NICs cap, qualifying expenditure under RDEC is similar to the SME R&D scheme with the main differences around subcontracting. The schemes are currently designed to ensure that relief cannot be claimed on the same expenditure more than once. For both schemes the expenditure must be R&D from the perspective of the claimant company. However, unlike the SME scheme where it is possible to claim relief for 65% of qualifying work subcontracted to an unconnected party under RDEC such payments are not allowable unless the facts around the working relationships mean that those costs fall within the Externally Provided Worker category.
The more generous R&D SME scheme has seen exponential growth in claims in recent years leading to growing speculation of abuse of the scheme and ‘boundary pushing’ by SME claimants and their advisors. Following review, last year’s Autumn Statement announced several measures aimed at tackling abuse and to rebalance the relief towards the RDEC scheme. The much-needed increase in RDEC benefit is long overdue and will come as a welcome change to large businesses, SMEs that are in receipt of grant funding and SMEs that are applying for RDEC relief due to being part of a larger group.
Rate changes for expenditure incurred on or after 1 April 2023:-
· RDEC rate increased from 13% to 20%
· SME additional rate deduction reduced from 130% to 86% and SME tax credit decreased from 14.5% to 10% *new rates to apply for R&D intensive SMEs.
NB. Benefit expressed in terms net of tax. Where an SME makes a profit of under £50,000, the tax benefit received will be 16.34% and for profits between £50,000 and £250,000 (marginal relief) resulting in a tapered tax benefit between 16.34% and 21.5%.
Merging of the RDEC and SME schemes
There is political disquiet about the increasing cost to the exchequer particularly around the SME scheme where most of abuse is perceived. The Government nonetheless recognises the important role that R&D plays in driving innovation and economic growth and has recently closed its consultation on merging the two schemes. The Government intends to keep open the option of implementing a merged scheme from April 2024. Draft legislation is intended to be published this summer and following technical consultation, any final decision will be announced at a future fiscal event. Keep abreast of developments at www.thirdrock-tax.co.uk
Notes to Editors: Chris Williams is a Fellow of the Association of Taxation Technicians with over 30 years post qualification experience in both professional tax practice and industry. He is currently leading the team advising on innovation reliefs at ThirdRock.