The Research and Development Expenditure Credit (RDEC) is the credit scheme for larger businesses, but what are the advantages of claiming R&D tax credits as a large company?
Small is beautiful – at least when it comes to the government’s scheme for providing financial help to science and technology businesses. Under the research and development tax credits scheme, small companies are entitled to a much higher percentage of their costs back than large ones.
However, there are some advantages to claiming as a large business rather than as a small one. Let’s have a look at what those are.
What is the research and development tax credit scheme?
The scheme gives companies working in a range of sectors some of their tax back to help them cover the costs of research and development. This activity must be looking to resolve scientific and technological questions.
It’s open to businesses of any size, but there are two branches for companies of different sizes. Small companies are classed as those with fewer than 500 employees, and either a turnover of less than €100 million (£86 million) or a balance sheet of less than €86 million (£74.1 million). They can claim up to 33 per cent of their eligible costs back under the SME branch of the scheme.
Larger companies have to claim under the other branch of the scheme, called the RDEC (Research and Development Expenditure Credit), and can expect to receive just under ten per cent of their costs back under the current rate of corporation tax (19 per cent). Although this is a smaller percentage than for small businesses, the sums involved are substantial: the average RDEC payout in 2016-17 was £272,881.
The benefits of RDEC
Firstly, unlike SME credit, RDEC can be accounted for above-the-line in your profit-and-loss accounts, as if it is a grant. This means it shows as part of your profits and makes you more attractive to investors. It also, however, means that it is taxable.
Secondly, RDEC works in the same way for profit and loss-making companies, unlike the SME scheme which treats profit and loss-making companies differently. This means the benefit you are likely to receive is easier to forecast, unlike with the SME scheme where it can be quite changeable from year to year even if your spending is reasonably consistent. If you made a loss, you may be able to receive the credit as cash from HMRC.
Thirdly, the rules are stricter for companies who subcontract work under RDEC than under the SME scheme, but the amount they can claim back is more generous. Unlike under the SME scheme, money spent on subcontractors does not normally qualify for a rebate under RDEC, unless the subcontractor is an individual, a partnership of individuals (so not a corporation) or a charity, higher education institute, scientific research organisation or health service body. However, whereas SMEs can only claim 65 per cent of the money spent on subcontractors, RDEC has no such cap: you can claim the whole lot.
Sometimes, small companies aren’t allowed to use the SME scheme, and have to claim under RDEC instead. These include:
- If they have received a Notified State Aid grant or subsidy
- If they have been subcontracted to do the research and development by a large company
- If they company are part of a group which, taken as a whole, would be big enough to count as a large company (so for example, a small business owned by a big corporation)
This r & d tax credit calculator from research and development tax specialists R&D Tax Solutions, who specialise in helping companies make successful claims, can give you an idea of how much you might be able to get back.