MSC R&D Paid-on-Results; Fast-Track Process; Expert Teams
R&D Expenditure Credit (RDEC)
In 2013 the government introduced a new tax relief for large companies, the R&D Expenditure Credit (RDEC).
The previous large company relief (which is being run down until April 2016) was an enhanced deduction of an extra 30% of qualifying expenditure from a company’s taxable profits, but this attracted a variety of criticisms. Because it was dealt with by the tax department as part of the tax bill, it was not very visible to the technologists actually spending the money on R&D. If they did not see it, they would not be incentivised by it to spend more on R&D. Also, because the large company relief only reduced the tax bill, it was of no immediate value to companies that were loss making, and so not paying tax. These were companies that might need to invest in R&D to improve their profitability, at a time when cash was tight, so it was illogical to have an incentive that was of no immediate use to them.
Having listened to representations onthe subject, the Government introduced the new RDEC regime which can apply to expenditure from 1 April 2013. Currently this provides a cash benefit of 11% (taxable). Because it is a cash benefit, it is designed to be able to be accounted for “above the line” in the accounts – i.e. as income rather than tax. This means it can be more visible in the accounts, and technology budget holders in large companies are more likely to be able to identify it as a valuable addition to their budgets, rather than the company just treating it as a tax windfall.
The relief is currently worth 8.8% of qualifying spend in cash terms to a 20% corporation tax payer which compares favourably to the 6% that is still available under the old large company scheme. Given a choice most companies are already choosing to claim under RDEC, but this will become mandatory from 1 April 2016.
To simplify matters, the qualifying rules and administrative procedures are effectively identical to those that applied for the large company R&D relief. However some complexity of detail can arise in how you set the RDEC off against existing or future tax liabilities before getting actual cash.
How do you get the cash?
(This is a broad and slightly simplified outline. There may be minor exceptions, or knock on effects for later accounting periods – for full details contact us)
- You claim the RDEC, at 11% in your company tax return. This also has to be included in the company taxable trading income. Assume RDEC is 11,000. If the company has a CT liability for the Accounting Period, the RDEC is set against that. If you have already paid the tax you will get a refund (although without interest). For companies paying CT this is all that is involved.
- Any unused RDEC is carried forward to this nextstage. This stage also applies to companies which are loss makers. You reduce the remaining RDEC by the current rate of CT. The amount deducted can be carried forward against any future CT liabilities. So if £11,000 was the starting figure it reduces to £8,800, with a £2,200 credit available against future CT liabilities
- Then you check if the company has paid as much PAYE and NIC in respect of workers on the R&D projects as it is claiming in RDEC. If not, some of the RDEC is held back to the next Accounting Period. This stage is known as the PAYE cap, and is described in a bit more detail below
- Then you look to see if there are any other tax liabilities that you can set the remaining RDEC against. This can include PAYE, VAT and other taxes. You can also surrender the amounts to other group members for offset against their CT liabilities
- If there is still unused RDEC you can receive it in cash, so long as the company is a going concern.
HMRC are still developing administrative procedures to deal withthis process so it is a good idea to use an adviser who understands the detailed rules.
The PAYE Cap
This limit is to protect the UK Treasury against companies claiming RDEC in the UK, but doing all their R&D work abroad (e.g. through a branch). It means that the claimant cannot get out more in RDEC than it pays in PAYE and NIC attributable to the R&D workers. Although this may sound like a worrying obstacle, it is only intended (and likely) to bite where a lot of the R&D work is done abroad or using third party agency workers. MSC R&D can advise how to structure the claim to minimise any risk here. If the RDEC claimed exceeds this cap it is carried forward as though it is claimed in the next Accounting Period, and is tested again until there is sufficient PAYE/NIC available to frank it.
SMEs and RDEC
For expenditure which SME companies had to claim under the large company scheme ( because of subcontracting or subsidy issues), these companies can now make an RDEC claim, which means that for the first time SMEs can get cash for this sort of R&D expenditure.