Increase to large company relief scheme
R&D expenditure credit
Tax relief for research and development (R&D) is two-fold. There is the scheme for small and medium-sized enterprises (SMEs) and the research and development expenditure credit (RDEC). The RDEC is available to large companies and, in some circumstances, smaller companies not eligible for the SME scheme.
Pro advice. SME clients can also claim RDEC where they have been subcontracted by a large company to carry out R&D work, or in cases where they have received a grant or subsidy for an R&D project.
Under RDEC, a company receives a standalone “above the line” credit which brings qualifying R&D expenditure into account as a taxable receipt when calculating the company’s trading profits, boosting the visible profits. A corresponding credit is then offset against the corporation tax (CT) liability in the first instance.
For detailed commentary on RDEC
The rate of RDEC was 12% but has been increased to 13% from 1 April 2020. The illustration highlights the effect.
| RDEC @ 12% | RDEC @ 13% | |
| Turnover | £1 million | £1 million |
| General expenditure | (£500K) | (£500K) |
| R&D expenses | (£200K) | (£200K) |
| RDEC | £24K | £26K |
| Profit | £324K | £326K |
| Corporation tax | £61,560 | £61,940 |
| RDEC | (£24,000) | (£26,000) |
| Net tax position | £37,560 | £35,940 |
Pro advice. As a result of the increase in the rate of RDEC, the effective relief available to a company under the regime has changed from 9.72p for every £1 spent when the rate was 12% to 10.53 pence for every £1 spent now. Note this effective benefit is based on the current CT rate of 19%.
Other benefits
One of the main benefits to RDEC is that it can assist both profit-making and loss-making companies.
Although a company is required to use the credit to offset any current year CT liability in the first instance, there is some flexibility in how any excess credit can be used.
For example, a company may be able to surrender the remaining credit to a member of its CT group.
Alternatively, a company may be able to receive a payable credit from HMRC, which could assist companies looking for improved cash flow during this difficult time.
Giving advice
Large companies that do not have a sufficiently specialised in-house tax team may reach out to you for assistance in determining which of their projects qualify as R&D.
If your practice is unfamiliar with assisting with R&D claims, consider working with a specialist R&D advisor to ensure your client is claiming for all relevant expenditure. It is usually possible to use such services on a white label basis.
Pro advice. Unfortunately, HMRC does not provide an advanced assurance option for large companies.
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