Who is this relevant to? From when?
The reformed R&D Expenditure Credit or ‘RDEC’ regime applies to most companies for accounting periods commencing on or after 1 April 2024 (so accounting periods ended 31 March 2025 onwards).
The only exception is for loss-making R&D intensive SMEs who will claim under a different regime (similar to the old SME regime).
At a glance
The reformed RDEC offers a repayable credit of 20% of qualifying expenditure. The credit itself is taxable and so the net cash repayment is 15%/16.2% (after Corporation Tax at 25%/19%).
The company must be seeking an overall advance (or appreciable improvement) in technology or science via the resolution of technological or scientific uncertainty.
Who should claim the reformed RDEC?
To prevent duplicative claims RDEC is generally awarded to the ‘customer’ commissioning the R&D and taking the decision to initiate the R&D. Companies undertaking R&D under contract for a customer may be prevented from claiming. As a new area of legislation that is inherently subjective, this should be considered carefully.
Under the reformed RDEC regime, contracted R&D qualifies providing it is undertaken in the UK (or necessarily undertaken overseas). This is a change from the former RDEC regime.
However, companies undertaking contracted R&D can still claim if the customer is ineligible to claim (for example because they are not a UK company subject to corporation tax).
What is qualifying R&D?
Examples of qualifying R&D activities might include:
- Challenging developmental activities that go beyond known techniques
- Developing new materials, products or manufacturing processes that offer improved performance, increased outputs and efficiencies, or reduced waste, costs etc.
- Iterative development or ‘trial and error’ – note that the R&D doesn’t have to be successful to qualify
- Application of an existing technology in a new field of science, where the competent professionals did not know whether it was feasible / how to achieve it in practice
Patents are a good indication that qualifying R&D may have taken place.
Qualifying costs
Once eligible R&D activities are understood, the associated costs can be identified.
Qualifying costs can include:
- staff costs
- contracted R&D undertaken in the UK
- payments for Externally Provided Workers (agency staff) based in the UK
- consumable items including prototypes and materials used up as part of the R&D
- software licenses, data licences, cloud computing services and utilities
Note, contracted R&D and Externally Provided worker costs qualify providing they are undertaken in the UK (or necessarily undertaken overseas). These costs are restricted to 65% of the total expenditure.
Claim value
RDEC is given as a gross 20% credit that is accounted for ‘above the line’ a bit like a grant. It is taxable, resulting in a net repayable cash credit of 15% (after Corporation Tax at 25%). Loss making companies are taxed at 19% instead of 25%, meaning a slightly increased net credit of 16.2%.
Cash repayments are usually capped to £20k plus 300% of the company’s PAYE/NIC payments for an accounting period. Companies with few employees may have their repayment restricted by this although there is a cap exemption for companies whose employees are wholly or mainly creating or managing intellectual property.
How to claim
Claims are made annually for each accounting period as part of a company’s tax return.
An online ‘Additional Information Form’ summarising the claim must also be filed prior to the tax computations.
Companies have 2 years to file claims, for example a December 2025 year end claim must be filed by 31 December 2027.
Subject to the pre-notification requirement (below), preparing 2 years claims together is often most efficient, minimising the time required from the business.
Pre-notification requirement
Note, a new ‘pre-notification’ requirement was introduced for accounting periods commencing on or after 1 April 23 (so accounting periods ended 31 March 24 onwards). The deadline for pre-notifying is 6 months after the end of the relevant accounting period. If claims have already been filed within a 3 year window, pre-notification is not required.
A word of caution
How costs are accounted for can impact claims – consult early to ensure this isn’t a problem.
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