RDEC R&D tax relief in 7 steps

The Research and Development Expenditure Credit (RDEC) applies to large companies and to certain SME projects where the SME scheme does not apply. This includes scenarios where R&D expenditure has been subsidised or the company does not meet the SME size requirements for R&D tax relief. 

Although RDEC is well established in legislation, claims can still fail or attract HMRC enquiries due to misunderstandings of how the RDEC credit is applied once it has been calculated.

This guide explains the seven statutory steps of the RDEC R&D process. These steps apply for accounting periods beginning before 1st April 2024. These steps are mandatory and will reflect how HM Revenue & Customs process RDEC claims in practice.

Step 1: Discharge any Corporation Tax liabilities for the accounting period

Once the RDEC has been calculated, it is first applied against the company’s Corporation Tax liability for the same accounting period. This will be when the R&D expenditure was incurred.

This first step is mandatory in the RDEC process. Where a Corporation Tax liability exists for the period, RDEC must be used to reduce it before the credit can be applied elsewhere. There is no discretion to avoid this step.

This will reflect the fundamental nature of Research and Development Expenditure Credit (RDEC) as a taxable credit that forms part of the company’s Corporation Tax position, as opposed to a grant that is administered outside the tax system.

In practice, confusion usually arises where companies focus on the gross RDEC figure without considering their underlying tax position. For profitable companies, RDEC is generally recognised as a Corporation Tax reduction, not an immediate cash receipt.

Step 2: Adjustment to reduce the credit to a net of tax amount

After discharging the Corporation Tax liability for the accounting period, any outstanding RDEC credit is then reduced to reflect the Corporation Tax that would be payable on the credit itself.

Step two of this process will ensure that the benefit is delivered on a net basis. Although RDEC is calculated as a percentage of qualifying expenditure, it is treated as a taxable income. This tax adjustment reflects this treatment and aligns the credit with how it appears in both the statutory accounts and the tax computation.

The net value of the credit depends on the Corporation Tax rate applicable to the period and the company’s wider tax position. If a company’s tax team and accounting team are not aligned, this can create discrepancies during the claim process.

Step 3: Apply the PAYE and NIC cap

The third step will be the application of the PAYE and National Insurance Contributions cap. 

At this stage, the amount of Research and Development Expenditure Credit that can be utilised is restricted by reference to the company’s Pay As You Earn (PAYE) and Class 1 National Insurance Contribution (NIC) liabilities for the relevant accounting period. This cap applies regardless of the technical complexity or the scale of the R&D undertaken.

The purpose of the cap is to link the relief to UK employment taxes which reinforces the policy intention behind the RDEC R&D scheme. Where the cap restricts the credit, the excess is not invalid. It is carried forward through the remaining statutory stages of this process.

From a practical point of view, forecasting is vital as the impact of the cap needs to be considered early. Companies with lower PAYE and NIC liabilities may experience a delay in realising the benefit, particularly where a cash payment is expected.

Step 4: Discharge Corporation Tax liabilities for other accounting periods

If RDEC remains after the PAYE and NIC cap has been applied, it must then be used to discharge Corporation Tax liabilities from other accounting periods.

This includes any outstanding Corporation Tax liabilities from earlier periods. Where such liabilities exist, the credit must be applied to them before any surrender within the group or a cash payment is considered. 

This 4th step is particularly relevant where claims relate to earlier periods with unpaid Corporation Tax liabilities, it will often result in a reduced or nil cash payment.

Step 5: Elect whether to surrender the credit for group relief

Once the previous steps are complete, the company may elect to surrender some or all of the remaining RDEC credit to other companies within the same group. The amount that may be surrendered is limited to the credit available at this stage of the statutory sequence, after all prior mandatory steps and restrictions are completed.

This election must be made through the Corporate Tax Return and is only available where the statutory requirements for group relief are met. Surrender is not automatic and this decision should be considered in the context of the wider group tax position. A company is not required to surrender the credit and may still receive a cash payment. HMRC will expect any group relief elections to be consistent, clearly evidenced and properly reflected across all necessary tax returns.

Step 6: Discharge any other liabilities of the company with HMRC

Any amounts remaining at this stage will be applied against other outstanding liabilities owed to HMRC by the company. This includes VAT, PAYE or other assessed taxes such as overdue liabilities.

Before any cash payment can be made, HMRC will apply the remaining RDEC credit against these liabilities. This reflects HMRC’s approach of settling outstanding public liabilities before any funds are paid to the company.

This step often explains why the final cash amount received is lower than expected, even where the RDEC calculation itself is correct and the claim is otherwise compliant.

Step 7: Cash credit payable to the company

Any remaining balance after all prior steps have been completed is payable to the company as a cash credit. This will represent the final cash benefit of the RDEC claim.

The processing times may vary depending on if HMRC raises queries on the technical narrative, the identification of qualifying expenditure, or the internal consistency of the claim.

The quality and consistency of the claim will often influence how efficiently this stage is completed.

Key summary

A clear understanding of the statutory RDEC steps helps ensure the credit is applied as expected when a claim is processed.

A compliant RDEC claim relies on:

• Accurate calculation of qualifying expenditure.
• Clear understanding of the statutory application steps.
• Consistency between the Corporation Tax Return, statutory accounts, and supporting documentation.

For more information regarding the 7-steps of RDEC R&D tax relief, please contact a member of the Alexander Clifford team.