How to calculate RDEC

For accounting periods beginning on or after 1 April 2024, most companies now claim under a single, merged R&D scheme based on the RDEC model. Loss-making SMEs that meet the “R&D-intensive” criteria (broadly, qualifying R&D expenditure of at least 30% of total expenditure) may instead claim under the Enhanced R&D Intensive Support (ERIS) scheme, which provides a higher payable credit, subject to conditions.

To qualify, you must be carrying out certain categories of R&D in the fields of science and technology. These are detailed in the HMRC publication ‘Research and Development Tax Relief’. If your research qualifies, you can claim a taxable credit currently worth 20% of your eligible R&D expenditure (for expenditure incurred on or after 1 April 2023) against tax liabilities or a cash sum, and you can claim for RDEC if your business is making a profit or a loss.

You can find out more about eligible R&D expenditure in our article ‘A guide to research and development accounting’. Here, our small business accountants will walk you through how to calculate RDEC.

Steps to calculate RDEC

To work out how much RDEC you will receive, you need to make a series of calculations related to your overall tax position. This is because RDEC is treated as taxable income and must be included in your overall calculations for tax.

In this simplified example, we assume that your business has sales of £10,000 with cost of sales £5,000.

• Your gross profit after deducting cost of sales before including other expenditure is £5,000

• Your qualifying R&D expenditure is £1,000

• You will qualify for an R&D Expenditure Credit (RDEC) of 20% of £1,000 = £200

• Your other allowable business expenditure is £1,500

• Your total operating costs are £1,000 (R&D) + £1,500 (other business costs) = £2,500
  The RDEC is treated as taxable income and is shown “above the line” as other income, rather than deducted from costs.

• Your net profit before tax is calculated as: £5,000 (gross profit) – £2,500 (costs) + £200 (RDEC at 20%) = £2,700

• Your Corporation Tax liability will depend on your profit level. The main rate is 25% for profits over £250,000, with a small profits rate of 19% for profits up to £50,000. Marginal relief applies between these thresholds.

Here’s how it looks in a worked example:

The RDEC is subject to Corporation Tax as part of taxable profits. The net benefit is therefore the RDEC amount less the associated Corporation Tax charge. In some cases, the credit may be used to offset tax liabilities or, subject to conditions, be paid in cash.

Here’s how that looks in a worked example:

Corporation Tax is calculated on the £2,700 profit shown above, resulting in a liability of £513 at a 19% rate.

Other scenarios

As the example shows, the R&D Expenditure Credit (RDEC) increases taxable profits but provides a net financial benefit after tax, improving your overall post-tax position.

The RDEC is subject to a statutory set-off sequence. It is first used to discharge Corporation Tax for the period, then (subject to conditions) may be offset against other tax liabilities such as PAYE and NIC, with any remaining balance potentially payable in cash.

However, if your business is making a loss or is a start-up with no current tax liability, you may be able to receive a payable cash credit, subject to restrictions such as PAYE/NIC caps and the RDEC set-off rules. Under the merged scheme, the RDEC rate is 20%. However, if you qualify for the ERIS scheme as an R&D-intensive SME, you may instead claim a higher payable credit (currently 14.5% of surrenderable losses), subject to specific conditions.

The calculations become more complex if your business is part of a group or if you are carrying out qualifying R&D as a subcontractor. If you are part of a group, for example, where companies are part of a group, RDEC claims and tax liabilities may interact through group relief and the RDEC set-off rules, but the credit itself is not simply transferable between group companies without restriction.

For many businesses, the payable RDEC credit is subject to a PAYE and NIC cap, broadly equal to £20,000 plus 300% of the company’s PAYE and NIC liability for the period, which limits the amount that can be received in cash based on the company’s payroll costs.

In scenarios like this, it can be useful to take professional advice to find out which approach is most beneficial to your business.

Support from Accounts and Legal

This is a brief outline of the requirements for calculating RDEC. If you would like to discuss the accounting needs for your RDEC project, our team of experienced small business accountants will be glad to help.

To find out more, please contact us on 0207 043 4000 or via info@accountsandlegal.co.uk. You can also get an instant accounting quote using our online tool.