Understanding the RDEC Scheme tax credit for large companies

The RDEC scheme (Research and Development Expenditure Credit) offers tax credit benefits to innovative businesses creating scientific and technical advancement. In April 2024, the RDEC and SME schemes were merged into one new ‘merged RDEC scheme’. Eligibility has changed for overseas work, subcontractors and EPWs, and it’s now necessary to notify HMRC before you claim.

What is RDEC and how does the scheme work?

The UK RDEC scheme is a taxable credit for qualifying R&D costs. Qualifying companies can receive the payment as cash or use it to reduce Corporation Tax.

What is RDEC tax credit?

RDEC (Research and Development Expenditure Credit) is designed to cater to large company R&D tax credits. The incentive encourages innovation by rewarding companies for their contributions towards the UK economy. The scheme was introduced in 2013, and the rates have increased year on year. Between 2023 and 2024, expenditure credit rates went up from 13% to 20%.

You can still claim large company R&D tax credits even if you failed to make the advancement you sought, or you made a loss.

Who qualifies for the old RDEC scheme?

You can claim under the old RDEC scheme if you’re a large company with an accounting period that begins before 1 April 2024 and you have:

• A headcount of more than 500 staff
• A turnover of over €100 million
• Or a balance sheet total of or above €86 million

What RDEC scheme rate applies and what is the net benefit after tax?

The calculation of your R&D expenditure credit for the RDEC scheme will depend on whether you file under the old RDEC scheme or the new merged RDEC scheme, and is determined based on a proportion of your eligible R&D expenses.

What are the old RDEC R&D expenditure credit rates and how have they changed?

The RDEC rates you’ll receive with R&D tax relief for large companies are worked out as a percentage of your qualifying R&D costs. These depend on your accounting period end. For accounting periods between 1 April 2023 and 31 March 2024, you’ll receive 20%.

This means that if your qualifying costs spent on R&D for this year amounted to £1,000,000, you’ll get an RDEC credit payout of £200,000. However, this payment is treated as taxable income. If you’re taxed at 25%, this will result in a net benefit of £150,000.

Even if you made a loss, your tax credits are still taxable, so both RDEC profit-makers and RDEC loss-makers end up with the same net benefit percentage.

What are the RDEC R&D expenditure credit rates post-April 2024?

Companies with accounting periods beginning after 1 April 2024 will now file under the new merged RDEC scheme. The R&D expenditure rates are still 20% for profit-making companies.

The difference is that loss-making companies pay less tax on their RDEC credits. This will be a notional tax rate fixed at 19% instead of your main Corporation Tax rate. This means your net benefit will be 16.2%. 

RDEC scheme eligibility – What R&D expenditure can I claim for?

RDEC scheme eligibility for expenditure is very similar to the new merged RDEC scheme. The main differences relate to where the work is done, who can claim for subcontracted activity, and how non-PAYE labour is treated.

Costs that typically qualify under both regimes

The below costs meet both the old RDEC scheme eligibility and new merged RDEC scheme eligibility:

• Staff PAYE costs and pensions – Salaries, wages, bonuses, employer NICs and pension contributions for staff directly engaged in R&D
• Consumables and utilities – Materials, water, fuel and power consumed or transformed in R&D
• Software, data and cloud computing – Software licences, data licences and cloud costs
• Clinical trial volunteers – Payments to participants in qualifying pharmaceutical and life sciences trials

The new merged RDEC scheme for accounting periods beginning on or after 1 April 2024

The following costs can only be claimed as large company R&D tax credits under certain circumstances:

• Subcontractors – Payments to subcontractors in your claim where you decide, intend and commission the R&D (i.e. you are the engager)
• Overseas work – If it would be wholly unreasonable to do the work in the UK
• Externally provided workers – If EPWs are UK-based and on UK PAYE and NIC
• Grants and subsidies – As long as the costs meet the general rules
• Contributions to independent R&D – For R&D you direct or control

Costs that do not qualify under either scheme

The below expenditure doesn’t meet either RDEC scheme eligibility or new merged RDEC scheme eligibility, and cannot be included:

• Capital expenditure, including the purchase of land or buildings
• Costs related to patents and trademarks
• Rent and business rates
• Production and distribution costs for goods and services
• Redundancy payments
• Routine clerical or maintenance activities such as payroll administration

The 7 steps to making an RDEC tax credits claim – which forms, data and deadlines matter?

To claim large company R&D tax credits under the RDEC scheme, there are 7 key RDEC steps. These steps are the same for the new merged RDEC scheme:

1. Settle current Corporation Tax – Use the RDEC credit first to offset your in-year Corporation Tax; any surplus moves to step 2
2. Check net after tax – Compare the surplus to the net credit (gross credit minus tax); retain any excess to carry forward
3. Apply the PAYE/NIC cap – Limit the claim to PAYE and NIC for employees and EPWs directly involved in the R&D
4. Offset older Corporation Tax – HMRC may use remaining RDEC credit to clear unpaid Corporation Tax from earlier periods
5. Consider group surrender – You can surrender available credit to a group company to reduce their tax
6. Settle other HMRC debts – HMRC can deduct other liabilities such as VAT or PAYE
7. Receive your benefit – Any balance is paid as a cash refund, a Corporation Tax reduction, or both

Alexander Clifford can help you submit your RDEC claim and check you have everything you need for a smooth and compliant claims process.

What is the accounting treatment for the RDEC tax credit?

You can claim the RDEC tax credit through your Company Tax Return using the CTL supplementary pages. This large company R&D tax credit will be recorded as additional income, and can either offset liabilities or lead to a cash disbursement.

RDEC accounting treatment means compliantly recording and presenting your RDEC credits along with your financial transactions. 

Claiming RDEC as an SME

There are certain circumstances where a small to medium-sized enterprise (SME) is eligible to claim under RDEC (if your accounting period began before 1 April 2024):

1. You’re using grants – If an SME’s R&D initiative was financed by a grant or subsidy
2. You’re subcontracted – an SME subcontracted by a large company to perform R&D generally may claim under RDEC for its own qualifying costs (staff, consumables, etc.), assuming it’s within UK Corporation Tax
3. You’re owned by a larger company – If you’re involved in a partner enterprise or linked enterprise, you may be eligible for RDEC as opposed to the SME scheme

What are the benefits of claiming RDEC tax credit?

The RDEC tax credit is an unmissable opportunity for large companies to receive the reward they are entitled to. RDEC scheme unlocks several benefits:

• Receive financial fuel for your business – RDEC provides a tax credit that helps offset the costs associated with research and development (R&D) activities
• Financial position of a company – RDEC tax credits can be claimed regardless of whether the company is making a profit or operating at a loss
• Secure collaboration and partnerships – the RDEC scheme encourages collaboration between companies, research institutions, and universities, fostering knowledge sharing

Understanding the RDEC tax credit scheme for large companies – FAQs

 

Is RDEC R&D a government grant?

No – large company R&D expenditure credit RDEC scheme​ is a taxable Corporation Tax credit that appears as above-the-line income.. It rewards qualifying R&D activity by reducing your tax with RDEC credits.

What evidence do I need to make a claim through the RDEC scheme?

Keep clear technical evidence as proof for your large company R&D tax credit claim that shows the advance, the uncertainties, and the systematic work done. Link your eligible spend to a concise technical narrative.

What common RDEC HMRC enquiry triggers should large companies avoid?

Avoid vague technical descriptions and costs that are not directly linked to eligible RDEC R&D. Ensure eligible subcontractor entitlement, overseas work, and EPW costs are clear, and track CT600L figures to your accounts.

Which sectors typically benefit most from RDEC tax credits?

Engineering, manufacturing, pharmaceuticals, life sciences, energy, and software often meet RDEC scheme eligibility and see the largest claims due to technical uncertainty.

How can we help maximise your RDEC tax credit claim?

Whether you’re claiming under the old RDEC scheme, or the new merged RDEC scheme, our specialist team at Alexander Clifford can offer a streamlined RDEC R&D claim process for R&D tax credits.

Contact us today to check your RDEC scheme eligibility, identify your R&D expenditure credit and start your RDEC R&D claim with confidence and uplift your financial status.