RDEC: R&D expenditure credit

For a large company, RDEC is given as an above the line expenditure credit calculated as a percentage of the qualifying expenditure for the relevant accounting period. It is treated as income, positively impacting EBITDA and increasing a company’s taxable profits. RDEC is claimable by large companies or SMEs undertaking subsidised R&D and projects contracted to them by large companies.

Large company classification

A company is generally classified as large if one or more of the criteria below are satisfied (at a group level):

Total staff of more than 500 people
Turnover greater than €100 million or balance sheet assets greater than €86 million

What costs qualify for R&D relief?

Staffing costs (including gross salaries, wages, overtime pay, and cash bonuses), employer national insurance contributions, and employer pension contributions
Costs of externally provided workers (EPWs), which are the staff costs paid to an external agency for staff who are directly and actively engaged in the R&D project. EPWs must carry out R&D activities under the supervision, direction, or control of the claiming company, and the work should not constitute a contracting out of R&D activities.
Assuming the staff provider is unconnected, only 65% of the total EPW costs qualify for R&D relief
Consumables, which are materials that are consumed or transformed in the R&D process. These include utilities such as water, fuel, and power
Software, including the cost of software licences used in the R&D activities
For accounting periods beginning on or after 1 April 2023, data licences and cloud computing utilised in the R&D activities

How are benefits calculated?

From 1 April 2023, the RDEC rate and corporation tax rates changed, affecting the net benefit receivable by companies.

	RDEC Rate	Corporate tax rate
Before 1 April 2023	13%	19%
After 1 April 2023	20%	19% - 25%

From 1 April 2023, companies with profits lower than £250,000 can claim marginal relief, resulting in a marginal tax rate of between 19% and 25%.

Worked example

	Before 1 April 2023	After 1 April 2023 (companies with projects greater than £250,000)
Qualifying R&D expenditure	£1,000,000	£1,000,000
RDEC	13% x £1,000,000 £130,000	20% x £1,000,000 £200,000
The RDEC is treated as income and is therefore taxable.
CT paid on RDEC	RDEC x CT Rate £130,000 x 19% £24,700	RDEC x CT Rate 200,000 x 25% £50,000
Net benefit of RDEC	RDEC - RDEC CT liability £130,000 - £24,700 £105,300	RDEC – RDEC CT liability 200,000 - £50,000 £150,000
RDEC net benefit	10.53% of initial qualifying R&D expenditure	15% of initial qualifying R&D expenditure