Significant changes to the RDEC scheme, including more generous RDEC rate changes, came into effect on 1 April 2023. In this blog, we explain what’s changed.
R&D Tax Relief encourages businesses to invest in technological and scientific advancements. The Research and Development (R&D) Expenditure Credit scheme, or RDEC, is one of the UK’s key R&D schemes.
Along with the SME scheme, RDEC is a huge driver of innovation in the UK. More than £2.4 billion was claimed by over ten thousand businesses in 2021 alone. And it’s not just large organisations that benefit. While £2 billion was claimed by large companies, £365 million was given to SMEs who weren’t eligible for the SME scheme.
The RDEC scheme has been so successful that the government is considering merging the SME scheme into RDEC to simplify R&D Tax Relief, ensure that British taxpayers receive value for money while also aiming to reduce fraud and error. You can learn more about the proposed changes to a single scheme based on RDEC by reading our article R&D Tax Reliefs review: Why is the government considering a single scheme?
In the short term, recent changes have made the RDEC scheme more generous for claiming relief on expenditure on or after 1 of April 2023. This is because RDEC is seen to deliver better value for money. The HMRC’s research shows that for every £1 of support, RDEC incentivised between £2.40 – £2.70 of additional private research and development spend, while the SME scheme incentivised just £0.60 – £1.28.
With RDEC claims crucial to both UK business growth (and, therefore, growth of the whole UK economy), it is worth exploring how the recent changes to R&D Tax Relief have affected what you can claim.
A brief overview of RDEC
The Research and Development Expenditure Credit (RDEC) scheme is a UK-based initiative that enables large companies and certain SMEs to claim cash credits on eligible R&D expenses. Introduced in April 2013, RDEC replaced the large company scheme, which was phased out by April 2016.
Examples of eligible expenses include consumable items, contributions to independent R&D costs, externally provided workers, payments to clinical trial participants, software staff and subcontractor costs.
From 1 April 2020 to 31 March 2023, the RDEC rate was 13% of eligible R&D expenditure (the rate then rose to 20% afterwards). The credit is taxable, but companies can offset it against any corporation tax liability.
To qualify for RDEC, a company must be a going concern, not in liquidation or under administration, and undertake qualifying R&D activities that aim to develop an advance in science or technology.
You can find out more, including how to calculate RDEC, what costs qualify, and how to make a claim by reading RDEC Explained: Everything You Need To Know About The R&D Expenditure Credit Scheme.
Key Changes to the RDEC Scheme from April 2023
It’s important to remember that the changes only affect expenditure for Accounting Periods beginning on or after 1st April 2023.
The key RDEC changes are:
1. Increase in the RDEC Rate
The most notable change to the RDEC scheme is the increase in the RDEC rate. From April 2023, the rate will rise from 13% to 20%. This increase directly translates to a higher tax credit for eligible businesses, making R&D investments more rewarding. The RDEC benefit is taxable, with corporation tax (CT) going up from from 19% to 25% from 1 April 2023.
2. Expansion of qualifying costs for RDEC
Another significant change to the RDEC scheme is expanding qualifying expenditure categories. From April 2023, companies can include data licence costs and cloud computing costs, including storage, as part of their qualifying R&D expenses. This amendment acknowledges the growing importance of digital technology in modern R&D processes and ensures that businesses investing in these areas receive adequate support.
3. Delay to restrictions on overseas workers
Initially planned for April 2023, the government is introducing restrictions on some expenditure for overseas subcontractors and Externally Provided Workers (EPWs) not paid through a UK payroll. This measure will now come into effect in April 2024 at the earliest. You can find out more by reading Overseas R&D expenditure: everything you need to know about qualifying overseas expenditure (QOE).
5. You must provide more details with your claim
Companies are now being asked to include more details with their claims. Claims must include additional information, such as a breakdown of R&D projects by expenditure types. Additionally, claims must be supported by a named officer of the company. Claims must also include details of any associated agents helping you submit your claim.
6. RDEC claims must be submitted digitally
To allow HMRC to review information better and make risk assessments easier, all RDEC claims, except those with an exemption, must now be done online.
7. RDEC claimants must submit a pre-notification of their claim
Following the changes, businesses claiming RDEC for the first time or have not made any claims in the past three accounting periods must submit a pre-notification of their claim to HMRC online.
You can learn more about how R&D Tax Credits are changing from April 2023.
How to prepare for making an RDEC claim
To navigate the upcoming changes to the RDEC scheme, businesses should:
Reassess their R&D expenditure
With the inclusion of data and cloud computing costs as qualifying expenditure, companies should revisit their R&D expenditure and identify any additional expenses that could now be eligible for RDEC claims (again, this is only for spend on or after 1 April 2023).
Stay Informed of future RDEC changes
The government considers RDEC to be better value for money for the British taxpayer, so there may be further changes beyond 2023 (especially if the SME scheme merges with RDEC). We recommend that you keep up-to-date with the latest RDEC developments and seek expert advice to ensure your business is well-positioned to maximise the benefits from the scheme.
How Leyton can help
At Leyton, we’re here to help you navigate these changes and make the most of your RDEC claim. Our expert team of tax and technical consultants will guide you through the process and ensure you’re on the right track to maximise your claim.
