The RDEC scheme explained

What is the RDEC scheme?

RDEC stands for R&D expenditure credit. The credit is a percentage of a company's qualifying R&D expenditure. It is claimed on the Company Tax Return rather than applied for like a grant, and the amount is treated as trading income. ^[1]

Since 1 April 2024 there are two schemes, the merged RDEC scheme and enhanced R&D intensive support (ERIS), and they replace the old RDEC and small and medium-sized enterprise (SME) schemes for accounting periods beginning on or after that date. The old schemes still govern earlier periods. ^[1]

HMRC's manual notes that although the new RDEC is often called a relief, it is strictly a taxable credit. ^[2]

What is the rate?

For accounting periods beginning on or after 1 April 2024, the merged RDEC rate is 20% for non ring-fenced trades and 49% for ring-fenced trades. The rate applies regardless of when the expenditure in that period was originally incurred. ^[3]

The credit is the qualifying expenditure multiplied by that rate, and a company does not have to claim the maximum. ^[3] Our guide to calculating R&D tax credits works through the steps.

Who can claim the merged scheme?

The merged scheme can be claimed by companies that are trading, chargeable to Corporation Tax and have a project that meets the tax definition of R&D. ^[1] There is a single set of rules for claimants of any size. ^[2]

A company can be eligible for both the merged scheme and ERIS, but it cannot claim under both for the same expenditure. ^[1]

How is RDEC different from a grant?

A grant is a payment awarded after an application. RDEC is a credit calculated from a company's own qualifying costs, reported on its Company Tax Return. The credit is itself taxable, so the benefit to the company is less than the headline rate. ^[1]

Receiving a grant or other subsidy has less effect than it used to. For accounting periods beginning before 1 April 2024, subsidised costs could force a claim into a particular scheme. For periods beginning on or after that date, there is no restriction on claiming for subsidised costs under the merged scheme or ERIS. ^[4]

What is the difference between RDEC and enhanced R&D intensive support?

The rules on qualifying expenditure are identical, but the credit is calculated differently. ^[1] ERIS is aimed at loss-making R&D intensive SMEs. It gives an extra 86% deduction when working out the adjusted trading loss and a payable credit worth up to 14.5% of the surrenderable loss. ^[1] A company that is profit-making or not R&D intensive can claim under the merged RDEC scheme instead. ^[1]

What changed from the old scheme?

HMRC's manual lists the main differences from the old RDEC scheme. ^[2]

• One set of rules applies to claimants of any size.
• A lower rate of notional tax is available at step 2 of the payment steps to small profit-makers and loss-makers.
• A more generous PAYE cap applies at step 3.
• Contributions to independent R&D can no longer be claimed.
• Claimants can generally claim for R&D they contract out, and generally cannot claim for R&D contracted out to them, subject to transitional provisions.
• Payments to contractors and to externally provided workers face overseas restrictions.

How is the credit paid out?

The credit goes through payment steps before any cash reaches the company. It is used first against the company's Corporation Tax for the period, then tested against the net amount claimed and against PAYE and National Insurance or the PAYE cap. It can then be used against earlier periods, other group members' Corporation Tax and other liabilities to HMRC. Whatever remains can be paid to the company if the going concern conditions are met. ^[5]

The credit paid in a period cannot exceed the PAYE cap unless the company is exempt. The cap is £20,000 plus 300% of the company's relevant PAYE and National Insurance liabilities, and any excess under the merged scheme is carried forward to the next period. ^[1]

What do I need before I claim?

A first-time claimant has to send HMRC a claim notification form within a set period, or the claim will be invalid. ^[6] An additional information form must also be submitted before or on the same day as the Company Tax Return, or the claim will not be accepted. ^[7]

Whether a company's projects and costs qualify depends on the facts. A specialist adviser can check them, and HMRC decides whether a claim is accepted. If you would like help with an R&D claim, a review could identify whether your business may be entitled to a credit.