The UK government designed a tax incentive scheme to reward innovative companies for investing in R&D or research and development. This tax credit incentive is called research and development expenditure credit or RDEC. It applies to large companies and in some cases is also applicable to SMEs.
What is RDEC?
The UK government offers two schemes to promote private sector investment in innovation. RDEC is specifically designed for large companies while SMEs qualify for the SME R&D tax credit. The tax credit that falls under RDEC is usually worth 12% of a company’s qualifying R&D expenditure. The credit is taxable at the normal corporation tax rate which means that the benefit is worth 10p for every £1 one spends in qualifying R&D expenditure. It can be used to offset existing company tax liability or paid out in cash.
The tax credit can be treated as above-the-line in your income statement. This provides a visible positive impact on the profitability of a business account. Since RDEC is not affected by a company’s tax position, it is easier to forecast the benefit they will receive which in turn makes it easier to factor the relief in major investment decisions. Another benefit of RDEC is that it can be used by both loss-making and profit-making companies.
What activities qualify for the credit?
The Department for Business, Innovation and Skills produced the defining guidelines used in identifying activities that qualify for R&D tax credits. The definition is broad and covers a wide range of sectors. The rule of thumb is that if a company is taking risks by resolving technological and scientific uncertainties, they may be carrying out a qualifying activity. Another example is the innovation of new products, processes, services, or modifying existing ones.
What are qualifying expenditures?
Once the business has identified a qualifying activity, the next step is to identify the expenses that can be included in the financial calculation for the tax credit. Here is a list of qualifying expenditure for RDEC:
- Overall staff cost including salaries, pension contributions, and reimbursed business expenses.
- Money spent on outsourced workers including subcontractors.
- Expenses from consumables such as materials and other resources.
- Software licensing costs.
- Expenses paid to clinical trial volunteers.
- Contributions made to independent research.
This is mainly an overview of what expenses qualify for tax credit. Remember that there are underlying complexities in identifying each cost since large companies have to deal with more demanding accounts. Nevertheless, if the business has the manpower or has the means to hire accounting professionals to do the work, there should be no issues with navigating the complexities and maximizing the value of the claim.
If you prefer to make the most out of your existing manpower to perform the calculations and file the claim, there is an abundance of online resources to help you with a step-by-step guide on how to file the claim. The main objective is to ensure that you can get the maximum benefit and credit for R&D activities undertaken by your company within the allowable time frame.