R&D Expenditure Credit for Large Companies

The R&D Expenditure Credit (RDEC) is a scheme that allows large companies and certain SMEs to claim tax relief on research and development costs for accounting periods that began before 1 April 2024. Unlike the SME scheme, RDEC provides a tax credit based on qualifying R&D expenditure that can be used to pay Corporation Tax and other liabilities. From 1 April 2024 onwards, companies must claim under the merged R&D scheme instead.

Who can claim RDEC

RDEC is available to your company if your accounting period began before 1 April 2024 and you fall into one of these categories:

• You're a large company (one that doesn't meet the SME criteria)
• You're an SME claiming for R&D work that has been subcontracted to you
• You're an SME and you've received notified State Aid for the R&D project
• You're an SME claiming for costs that have been subsidised (for example, through a grant)

To make a claim, your company must also:

• Be trading
• Be chargeable to Corporation Tax
• Have a project that meets HMRC's definition of research and development
• Have costs that qualify for the relief

If you're an SME and don't meet these conditions, you may be eligible for the separate SME R&D tax relief scheme instead, which offers different rates and benefits.

How RDEC rates work

The RDEC scheme calculates your tax credit as a percentage of your qualifying R&D expenditure. The rate you use depends on when your costs were incurred:

• 1 April 2015 to 31 December 2017: 11%
• 1 January 2018 to 31 March 2020: 12%
• 1 April 2020 to 31 March 2023: 13%
• 1 April 2023 to 31 March 2024: 20%

For example, if your large company spent £100,000 on qualifying R&D costs in the 2023/24 tax year, you would receive a tax credit of £20,000 (20% of £100,000).

What you can do with the tax credit

The RDEC tax credit is flexible and can be used in several ways:

First, it can be used to pay your company's Corporation Tax bill. It can also be applied to other group companies' Corporation Tax liabilities if your company is part of a group.

The credit can also be used to settle other tax liabilities, such as VAT.

If there's any credit remaining after paying all your tax liabilities, the excess may be paid directly to your company as cash.

However, there's an important restriction: if your tax credit is lower than the total you've spent on PAYE and National Insurance contributions, you cannot receive the excess as a cash payment. Instead, this amount is carried forward to future accounting periods as an expenditure credit.

Key differences from SME relief

RDEC works differently from the SME R&D tax relief scheme in several important ways:

Rate structure: RDEC provides a tax credit based on a percentage of costs (currently 20% for costs up to 31 March 2024), whilst SME relief enhances the deduction against taxable profits and can result in a higher effective benefit.

Who uses it: Large companies must use RDEC, whilst most SMEs use the SME scheme unless they fall into one of the specific RDEC categories (subcontracted work, State Aid, or subsidised projects).

How the benefit is received: RDEC generates a taxable credit that can be used against tax liabilities, whereas SME relief provides an enhanced deduction or, for loss-making companies, a payable tax credit.

Important changes from April 2024

If your accounting period began on or after 1 April 2024, you cannot claim under RDEC. Instead, you must use the Research and Development merged scheme, which combines and replaces both RDEC and the SME scheme.

What to do before claiming

Before making your RDEC claim, you must check whether you need to notify HMRC in advance that you're planning to claim R&D tax relief. This notification requirement applies to all companies.

If you're an SME eligible to claim RDEC, you may also be able to apply for advance assurance. This gives you confirmation from HMRC that your claim will be accepted, providing certainty before you invest time and resources in preparing your full claim.

You should also ensure your R&D project meets HMRC's definition of qualifying research and development, and that you've identified all costs that qualify for the relief.

Sources

• R&D expenditure credit for large companies and small and medium-sized enterprises

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.