RDEC scheme: what it is and how to claim

The Research and Development Expenditure Credit scheme, RDEC (‘R-deck’) for short, gives companies relief on their Corporation Tax for innovative projects which meet the scheme’s definition of ‘research and development’.

The tax credit for RDEC is 20% of your company’s qualifying R&D expenditure, for accounting periods beginning on or after 1 April 2023.

In this post, we’ll explain how the RDEC scheme works, what you can claim for and how we can help.

• Your R&D must be in science or tech
• You’ll need to demonstrate that your project is R&D
• You can claim if you’re researching a completely new field
• RDEC is one of two R&D tax relief schemes
• RDEC tax relief is 20%
• RDEC 7 steps – how to apply your R&D tax credit
• RDEC is not state aid
• You can claim for staff costs and consumables
• You have two years to claim
• Submit your RDEC claim with your tax return
• Example: How to calculate RDEC tax relief
• SeedLegals 💙 RDEC and R&D tax credits
• Talk to an expert

Your R&D must be in science or tech

All sorts of companies can claim R&D tax relief with the RDEC scheme – if you’re researching or developing an advance in your field, whether that’s fintech or food, energy or engineering, then it’s financially worth your while to find out if you’re eligible.

Your R&D must be in science and/or technology. In the changes to R&D tax credits coming in from April 2023, R&D in pure maths will qualify for the first time – this is great news if your startup works with, for example: AI, quantum computing, risk analysis or algorithms.

So, your company’s work appears to be in the right sector, but what projects count as R&D?

You’ll need to demonstrate that your project is R&D

When you apply for tax relief from the RDEC scheme, you’ll need to write a Technical Narrative to explain how your project meets these criteria:

• you looked for an advance in science and technology
  How does your project aim to create an advance in your field, not just an advance for your business? The ‘advance’ doesn’t have to have been entirely developed by your company – it might still count if the innovation was developed by another company but it isn’t yet publicly available and your company is improving it.
• you had to overcome uncertainty
  ‘Uncertainty’ here means that an expert on the subject, with all the available information, can’t say for sure if the solution you’re developing is technologically possible or how it could be done.
  In your Technical Narrative, you’ll need to explain that you and other experts didn’t already know how to achieve the advance.
• you tried to overcome the uncertainty
  What research, testing and analysis did you need to do? Explain what you did to overcome the uncertainty, both successes and failures.

You can claim if you’re researching a completely new field

If you’re researching something different from what your company usually does, you might be able to claim R&D tax relief. The project must relate to your company’s current trade or to a trade that you intend to start up based on the results of the R&D.

RDEC is one of two R&D tax relief schemes

The type of R&D tax relief you might be eligible for depends on the size of your company, if you had a grant for the work, and if you’re working on the project as a subcontractor:

SME R&D Relief is for startups and small businesses

With the SME scheme, you can claim tax relief worth up to 18.6% of your R&D spend. For this scheme, you’ll be considered an SME if you:

• employ less than 500 people
  factoring in partner companies or linked businesses, and
• turnover less than 100 million euros or a balance sheet total under 86 million euros
  (The amounts are in euros because the SME definition was written by the EU Commission.)

RDEC is for larger companies – and qualifying SMEs

If your company doesn’t fit the definition of an SME (see above), then you might be able to claim using the RDEC scheme.

You can also claim from the RDEC scheme if your company is a SME but you don’t qualify for SME R&D relief because one or all of these apply:

• your company was awarded a grant or subsidy for the R&D
• you’re doing the R&D as subcontractor to a larger business

Get in touch with us directly to find out how we can help you with your RDEC claim.

RDEC tax relief is 20%

If you qualify for RDEC tax relief, the credit you’ll get is 20% of your company’s qualifying R&D expenditure. The amount you get is taxable as trading income.

Usually, the credit is used against your Corporation Tax. Sometimes, the credit is used against a company’s other tax liabilities. And occasionally, for example if the company is loss-making, the relief is paid in cash by HMRC. Below we explain the 7 steps – how HMRC works out how to apply your tax credit.

RDEC 7 steps – how to apply your R&D tax credit

Here’s our easy-to-understand guide to the RDEC 7 steps. Use these steps to work out how your company will get your RDEC R&D tax credit. The principle here is that you use the credit to pay off any tax your company owes HMRC – only when that’s settled would you get a cash payment from HMRC.

The expert helping you with your claim – whether that’s your accountant, tax advisor or a SeedLegals R&D expert – will use these steps in this order to set out your tax credit in your company tax return:

1. Offset Corporation Tax
   Reduce your Corporation Tax for the accounting period for which you made the R&D claim by the gross amount of your RDEC tax credit.
2. Adjust the credit for CT tax
   After step 1, if you have any tax credit remaining, that amount is taxed at the same rate as Corporation Tax (the CT rate for the accounting period for which you made the claim).
   Next, if the credit remaining after step 1 is more than the net value of your total credit (total gross credit minus Corporation Tax), then use that net value for step 3…
3. Carry over any credit above the PAYE/NIC cap
   Is the amount of R&D tax credit remaining more than your company spent on PAYE tax and NI contributions for your R&D workers in the accounting period of the claim? If so, the excess credit carries over to the next accounting period.
4. Pay off any outstanding Corporation Tax
   Use the remaining amount to pay off any outstanding Corporation Tax you owe for other accounting periods.
5. Offset tax for a group company
   If another company in your group has tax payments outstanding, you can choose to apply your company’s R&D tax credit to offset their tax bill.
6. Pay off other tax
   If your company has other outstanding tax payments, such as VAT or PAYE, then HMRC will apply your remaining credit to these bills.
7. Get a cash payment
   If there’s still credit remaining after the previous six steps, then HMRC will send you the amount in cash.

There’s more about how to apply the tax credit on the gov.uk website.

RDEC is not state aid

If you successfully claim tax relief under RDEC, it won’t count as state aid.

If your company got a state aid grant for your R&D project – for example, an Innovate UK grant – you can’t claim R&D tax relief under the SME scheme, even if you meet the other criteria as a small business. This is because, unlike the RDEC scheme, the SME R&D scheme counts as state aid and you’re not allowed to receive state aid twice for the same project.

You can claim for staff costs and consumables

There are strict criteria for ‘qualifying expenditure’ for RDEC.
Here’s what you can and can’t claim for:

✅ Employees working directly on the R&D project
You can claim the appropriate proportion of their salaries or wages, bonuses, Class 1 National Insurance and contributions to their pension. Similarly, you can claim for admin or support staff whose work directly supports the R&D project.

✅ Agency or group staff working directly on your R&D project
You can claim up to 65% of the payments you make to an agency for staff, and/or up to 100% of the cost of staff from another company in the same group as your company.

❌ Clerical or maintenance staff
You can’t claim for work that would have been done anyway, such as payroll, accounting, marketing and legal.

✅❌ Subcontractors
Whether you can claim for subcontractor expenses depends on who the contractor is. You can claim for 65% of subcontractor costs if the work is done by:

• a charity
• a higher education institute
• a scientific research organisation
• a health service body
• an individual or partnership of individuals

✅ Consumables
You can claim for consumables – materials and utilities that you use up in the R&D project, such as electricity and water.

✅❌ Software
You can claim some costs for programs and systems you use for the R&D project such as CAD and CAM software and services such as GitHub. The amount you can claim is the proportion you use the software for the R&D project. The rules for software ‘apportionment’ are set out in this guidance from HMRC.

❌ Producing, storing and distributing goods and services

❌ Land, rent or rates
You can’t claim the cost of land, your rent or business rates on your properties.

❌ Patents and trademarks

❌ Capital expenditure
You can’t claim under RDEC for things you buy that have enduring value and you can use beyond your R&D project, for example: vehicles, machinery or equipment.

You have two years to claim

You can claim costs on your R&D projects from the date you start working on the problem until you develop the advance – you’ve solved the technological uncertainties – , or the project ends or stops.

The government defines the ‘end’ of your R&D as when you have a working prototype and before you go into commercial production. Market research, marketing and commercial testing doesn’t qualify as R&D activity. You might have to stop the project before it gets that far – and you can still claim for the R&D even if the project was ultimately unsuccessful.

So when should you claim? And what happens if your R&D is ongoing? For RDEC, you’ll need to make your claim in the two years after the end of the accounting period in which you were spending on the project. If your R&D is ongoing, that’s fine – you’ll need to submit separate claims for each accounting period.

Submit your RDEC claim with your tax return or with SeedLegals

You can claim RDEC tax relief online by entering your R&D costs in your company tax return. You’ll need to submit extra information to support your claim: the Technical Narrative. There are full details about what you need to submit at the gov.uk website.

You can also create your claim on SeedLegals using our guided workflow and support from experts every step of the way. Get in touch with our R&D team to find out how we can help you prepare your claim.

Example: How to calculate RDEC tax relief

Here’s an example of how to work out the amount you can claim with the RDEC scheme. You – or your accountant or tax advisor – will need to do this calculation to enter the amount in your company tax return to show how much tax relief you’re claiming.

1. Work out your R&D costs
Add up how much you spend in each category of the qualifying expenditure, and work out how much you can claim:

• Employees working directly on the R&D project
  £200,000 on salaries, bonuses, employer’s NI and pension contributions
  You can claim up to 100% = £200,000
• Externally provided workers
  £35,000 on one expert individual
  You can claim up to 65% = £22,750
• Consumables
  £2,000 on materials
  £500 on electricity, gas and water
  You can claim up to 100% of these consumables = £2,500

2. Total up your costs

• Add the claim amounts for all the cost categories:
  employees + externally provided workers + consumables
  £200,000 + £22,750 + £2,500 = £225,250

3. Multiply by 0.2
The tax credit you could receive is 20% of your allowed R&D costs:
£225,250 x 0.2 = £45,050
£45,050 is the amount you enter on your tax return as your R&D tax credit.

SeedLegals 💙 RDEC and R&D tax credits

At SeedLegals, we’re big fans of the R&D tax relief scheme because it can be a source of a very useful cash boost for startups. Before a company is profitable, the team burns through money developing products or services – money back from HMRC means founders and their teams can keep working for longer without having to find investors.

We also align with the spirit of the R&D tax relief schemes. The government designed the schemes to encourage and reward innovation in the UK. This consistent endorsement for over a decade shows how valuable our startup ecosystem is to the country.

We’ve helped hundreds of businesses prepare their claim for R&D tax relief. Our team of experts know how to prepare winning claims – in 2022, the average claim awarded to our customers was an impressive £42,000. Just think what you could do with that amount of cash.

Talk to an expert

Got questions about RDEC or R&D Tax Credits for startups? Book a free call with one of our experts: