The Research and Development Expenditure Credit, introduced in 2013, is a UK tax incentive designed to encourage large companies to invest in R&D in the UK. Companies can reduce their tax bill or claim payable cash credits as a proportion of their R&D expenditure. The initiative builds on the existing R&D Tax Credit scheme which has been in operation for large companies since 2002 and is one of a number of technology tax relief schemes introduced by successive UK Governments. Originally referred to as to as "Above the Line R&D Tax Relief", because the payable credit for large companies is now shown above the tax line and can effectively be accounted for as income in the profit and loss statement, RDEC is now the common terminology used for the scheme.
History
R&D tax relief is designed to incentivise investment in R&D. The scheme was introduced in 2000 for small and medium enterprises, with a separate scheme for large companies launched in 2002. Any company carrying out R&D is likely to qualify for the relief. The definitions of eligible R&D and costs are reasonably broad, and eligible R&D can be found in completely unexpected areas. Large companies could previously only offset the credit against corporation tax liabilities. This meant large businesses running R&D cost centres in the UK, but with profit centres outside the UK, were unable to benefit from the relief. It also meant the credit was largely invisible to R&D decision-makers because it was embedded in the tax computation. As a result of lobbying from industry, the government launched a consultation in the 2012 Budget on changes to the Large Company R&D Tax Relief scheme. In the March 2013 Budget, the Chancellor of the Exchequer confirmed the new R&D Expenditure Credit for large companies with a payable rate of 10 per cent for R&D expenditure incurred after 1 April 2013. This credit is designed to make R&D relief more visible to those making R&D budgeting and investment decisions. It should also provide better cash flow for companies with no corporation tax liability, and thus should promote the UK as the preferred location for multi-national corporations deciding where to site their R&D operations. It will also help to improve corporate earnings because it now appears above the tax line.
Overview
The 10 per cent payable credit rate equates to a net benefit post-tax of 7.7 per cent of eligible expenditure for large companies. The definitions of large and small company size are driven by the EU classifications including revenues, number of employees and balance sheet assets. The Chancellor of the Exchequer announced in his 2014 Autumn Statement that the taxable credit available to companies claiming under the RDEC regime has been increased from 10% to 11% providing an after tax benefit of 8.8% of the qualifying R&D expenditure incurred after April 2015. The existing large company superdeduction scheme will continue to run in parallel with the RDEC until April 2016, allowing a large company to claim the payable credit above the lineor to deduct an additional 30 per cent of its eligible R&D costs in its tax computation. The steady state cost of the RDEC, after the initial phasing-in period, is forecast to be approximately £265 million per annum in terms of corporation tax revenues foregone by HM Treasury.
How it works
In all respects, the RDEC will work like the existing R&D Tax Credit. The nature of the tax relief has not changed, only the method of delivery of the tax relief. There are various principles which need to be respected. Eligible R&D must be:
seeking to achieve an advance in science or technology
subject to scientific or technological uncertainty
conducted in a systematic and thorough fashion
Eligible costs include staffing costs, consumables, software, subcontractors, prototype costs, clinical trial costs and research contributions. Critically these costs must be mapped to the eligible activities.
The government established a Working Group, to complement ongoing public consultation on the R&D Tax Relief initiative and to discuss options and proposals in more detail. Members of the Working Group include representatives from: HMRC and HM Treasury; industry; the financial services community including large accounting firms and independent consultants, ; and representatives from professional bodies.
