RDEC Tax Credit (Research and Development Expenditure Credit): How To Claim

The Research and Development Expenditure Credit (RDEC) scheme allows businesses to claim a taxable credit of 20% of eligible R&D costs.

The Research and Development Expenditure Credit (RDEC) scheme is a UK government initiative to support businesses that invest in innovation.

Available to large companies and certain SMEs, RDEC allows businesses to claim a taxable credit of 20% for eligible R&D costs, with a net benefit of around 15% depending on the corporation tax rate. The credit is treated as income so is visible to stakeholders and investors.

The RDEC scheme will be sunset by the new Merged R&D scheme for all companies claiming R&D tax credits for accounting periods on or after 1 April 2024.

In this article we will look at the key features of the RDEC scheme, how it works and how businesses can make a claim before the new scheme takes effect.

What is the RDEC Scheme?

The Research and Development Expenditure Credit (RDEC) scheme, alongside the SME scheme, is one of two primary R&D tax relief schemes in the UK. It was specifically designed to promote innovation among large companies but also certain SMEs under certain conditions.

Introduced in 2013, companies can claim R&D tax credits “above-the-line” as taxable income rather than as below-the-line benefit. This represents a significant difference from the SME R&D scheme. Why “above the line”?

• The credit is taxable income in profit-and-loss accounts, making the financial benefits of R&D visible to stakeholders and investors.
• This visibility is a key differentiator from the SME scheme, where relief is treated as a below-the-line benefit.

The RDEC scheme will be replaced by the new merged R&D scheme (R&D Expenditure Credit) for all claims related to accounting periods starting on or after 1 April 2024. However, businesses claiming for accounting periods before this date must continue to follow the original RDEC rules.

Who can make an RDEC tax credit claim?

Any UK company with qualifying R&D projects can make an RDEC claim. To qualify, your project should aim to make an advance in science or technology by overcoming a scientific or technological uncertainty, guided by a competent professional.

If you’re unsure if your activity counts as R&D, then it’s worth reading our comprehensive R&D eligibility guide, which covers this topic in more detail.

However, not every single UK company will claim through the RDEC scheme…

The RDEC scheme, for accounting periods before 1 April 2024, is primarily designed for large businesses. However, certain SMEs also have to claim under the RDEC scheme in specific circumstances. If your accounting period falls before 1 April 2024 and you don’t meet the RDEC criteria, you’ll likely need to claim through the SME scheme, which offers a benefit of up to 27%.

1. Large Companies

RDEC is designed for companies with:

• 500+ employees, and
• Either €100m turnover or €86m balance sheet total.

These criteria align with the EU definition of large enterprises adopted by HMRC.

2. SMEs claiming under RDEC

Three types of SMEs had to use the RDEC scheme:

• State Aid Recipients
  Small companies that have received “notified state aid” may need to claim either partly or fully through the RDEC scheme. Most government-backed grants will qualify as notified state aid, although there are some exceptions. Additionally, the number of projects you claim for, and whether the grant is project-specific or not, will have an impact. Find out more in our guide to grants and R&D relief.
• Partner or Linked Enterprises
  Secondly, SMEs whose ownership is partly held by a large company may need to claim through the RDEC scheme. If a large company owns between 25-50% of the voting or share capital in the business, then it will be classified as a “partner enterprise”. In that case, the equivalent % of the partner enterprise’s workforce, balance sheet and gross assets must be taken into account when considering the size of the claimant’s company. For example, if your SME is 33.33% owned by a company with 1500 employees, then your employee count would be 500 + your company’s headcount.
• Subcontractors
  Thirdly, if you are carrying out R&D on behalf of another company as a subcontractor, then you will need to claim through the RDEC scheme rather than the SME scheme. This is to prevent excessive subsidisation of the same R&D projects by multiple companies, as the contracting company can also claim R&D tax credits for the work.

How much can you claim with RDEC?

The benefit of RDEC varies depending on the timing of the claim and the Corporation Tax rate in effect:

• Accounting periods before 1 April 2023:
  13% gross credit, resulting in an 11% net benefit after applying the 19% Corporation Tax rate.
• Accounting periods on or after 1 April 2023:
  20% gross credit, resulting in a 14.7%-16.2% net benefit, depending on Corporation Tax rates (19%-25%).

RDEC vs SME Scheme

Here’s a quick overview to help you better understand the key differences between the RDEC and SME schemes.

R&D Scheme (before 1st Apr 2024)	Description	Net Benefit	Key Features
RDEC Scheme	For large companies and certain SMEs.	20% gross, 15% net	Above-the-line credit.
SME Scheme	For most SMEs.	Up to 27%	Higher credit rates, not subject to Corporation Tax.

Qualifying costs for RDEC

The RDEC scheme allows claims for a range of R&D-related costs, including:

1. Staff Costs
   Salaries, employer NICs, and pensions for employees directly involved in R&D.
2. Consumables
   Materials, fuel, and power used up or transformed during R&D activities.
3. Software
   Licenses used specifically for R&D.
4. Externally Provided Workers (EPWs)
   Workers hired under your company’s direction.
5. Subcontracted R&D (limited eligibility):
   Only claims involving individuals, partnerships, or qualifying bodies like universities, NHS trusts, or charities were allowed.

For more details, see our guide to qualifying R&D costs.

Accounting treatment for the RDEC scheme

In 2013, the government changed the accounting treatment of the RDEC scheme so that the credit appears “above-the-line”.

The motivation for the change was that it allows the departments that carry out R&D to show the credit as income when calculating their profit before tax. Prior to this change, the credit would be accounted for in the broader company income statement. The change ensures that those making the decisions to conduct R&D are clearly remunerated.

While that was the stated intention, the broader benefits are also significant. By placing the credit above-the-line, the visible income of the company is positively impacted. This increases the appeal of businesses in the eyes of investors and the public markets. It has become a significant factor for multinationals in deciding to locate their R&D activities in the UK.

Preparing and submitting an RDEC claim

Part 1: Identify Qualifying Projects

The first step to claiming R&D tax credits is identifying which of your projects qualify. Understanding the eligibility criteria is key to determining if your work meets the requirements.

It’s also good to collaborate with the “competent professional” to gather all the necessary evidence and technical data to demonstrate how your R&D qualifies. It’s best practice to do this in-year!

Part 2: Break Down Activities and Costs

Next, you’ll need to outline the specific activities and costs associated with your R&D projects. Start by identifying the direct and indirect activities that qualify, then list all the related costs—such as employee wages, materials, and other expenses.

It’s important to accurately allocate these costs, ensuring they are directly tied to qualifying R&D activities. You’ll also need to calculate what percentage of each cost is eligible for relief under the RDEC scheme. Taking the time to do this thoroughly will help ensure it’s compliant.

Part 3: Prepare the Additional Information Form (AIF)

Since the 8th August 2023, it is compulsory for claimants to submit an additional information form as well as the CT600/CT600L. This is there for you to provides, as it says on the tin, more information. Ranging from financial information to technical data about your R&D project. This isn’t a substitute for an R&D tax claim report, we recommend submitting this as well.

Part 4: RDEC 7 steps

Finally, when submitting an RDEC claim, there are seven steps that you need to complete before the submission happens.

To help explain these steps, we’ve provided example company financials below:

• £2m accounting profit before R&D costs
• £400,000 R&D costs
• £70,000 PAYE & NIC costs relating to R&D
• £200,000 corporate tax loss
• No other outstanding tax liabilities
• RDEC rate is assumed to be at 20%

The company will need to then undergo the following seven steps to calculate its RDEC credit:

1. Offset corporation tax liabilities

Firstly, you’ll need to offset any pre-existing corporation tax liabilities from the headline RDEC credit rate. If you have a credit remainder, then that carries on to step 2.

Example: R&D Costs of £400,000 x 20% = £80,000. No corporation tax liability, so all of the £80,000 carries forward to Step 2.

2. Apply the notional tax rate

In order to ensure that both profit and loss-making companies receive the same net benefit, you’ll need to apply a “notional tax rate” of 25% to the balance regardless of your financial position.

Example: £80,000 RDEC credit – 25% = £60,000 RDEC credit carried forward to Step 3. £20,000 carried forward to future accounting periods, which reduces future corporation tax liabilities.

3. Limit the credit to the R&D PAYE/NIC cap

HMRC cap the credit to the total value of the PAYE and NIC contributions for the workers involved in this RDEC claim. Any amounts in excess of the PAYE/NIC cap will be carried over to next year’s claim period,

Example: PAYE & NIC Costs of £70,000, so £60,000 credit passes to Step 4.

4. Honour corporation tax liabilities

At this stage, you must honour any corporation tax liabilities held from previous accounting periods. Those will then offset the credit amount due here.

Example: No corporation tax liabilities from previous accounting periods held. £60,000 carried on to Step 5.

5. Surrendering the credit for group relief

The amount taken from step 4 can be transferred to another group company to offset against their tax liability. This is optional. You can still receive your credit even if other companies in your group have outstanding tax liabilities.

Example. No group relief opted for. £60,000 carried on to Step 6.

6. Honour other tax liabilities.

Now you’ll need to deduct any other tax liabilities held from previous accounting periods, eg unpaid VAT or PAYE.

Example: No additional liabilities held. £60,000 carried on to Step 7.

7. Credit paid after HMRC tests.

If your company is a “going concern” and is not subject to an HMRC enquiry on its tax return, then the credit will be paid out in full.

Example. £60,000 paid out as cash credit (15% of total R&D expenditure).

This process can become quite complex for some companies, especially if they have liabilities from prior accounting periods. At EmpowerRD, we offer consultations at the late stages of the RDEC claim process if needed. So get in touch with our team, and we’ll be happy to advise on your specific case.

Example RDEC Credit Calculation

How does the merged R&D scheme impact you?

Why did the RDEC Scheme evolve?

Although the RDEC scheme was effective for large companies, it had limitations:

• SMEs had to navigate complex rules to claim under RDEC.
• Fraud and error rates were higher under the SME scheme.

The merged R&D scheme, introduced for accounting periods starting on or after 1 April 2024, simplifies the scheme by combining the benefits of both schemes into one unified structure.

Claiming under RDEC today

If you’re submitting a claim for an accounting period prior to 1 April 2024, you’ll need to follow the original RDEC rules outlined above.

For accounting periods beginning on or after 1 April 2024, you’ll need to use the merged R&D scheme instead. This retains much of the original RDEC structure, but also incorporates key features from the SME scheme.

Key Features:

1. Above-the-Line Credit
   R&D credits are shown as taxable income.
   • Offsets Corporation Tax liabilities and can result in cash payments for loss-making companies.
2. PAYE/NIC Cap
   Adopts the more generous cap from the SME scheme, ensuring flexibility for claims.
3. Contracted Out R&D
   Introduces new rules for subcontracted R&D, modelled on the SME scheme.
   • Companies contracting R&D to others can claim for those costs.
   • Companies contracted to perform R&D can only claim in specific circumstances (e.g., for charities, universities, or overseas entities).
4. Overseas R&D
   Limits relief for subcontractors and Externally Provided Workers (EPWs) based overseas, unless specific exceptions apply.
5. Subsidised R&D
   Removes restrictions on subsidised expenditure, simplifying claims for grant-funded R&D projects.

EmpowerRD Can Help

Navigating the merged RDEC scheme or understanding its history doesn’t have to be daunting.

At EmpowerRD, we’ve helped over 1,200 companies claim £250m+ in relief. Whether you’re transitioning from the SME scheme or adjusting to the new rules, we’ll make the process simple and stress-free.

Want to optimise your claim? Contact us today.