Upcoming changes to the R&D Expenditure Credit (‘RDEC’) Scheme

R&D Tax Relief plays a vital role in encouraging businesses to invest in R&D, helping them to grow and create new technologies, products and services.

Last year, the UK Government announced that it would be reforming the UK’s R&D Tax reliefs ‘to ensure public money is spent effectively and best supports innovation’.

It hopes that this will lead to increased R&D activity, private investment and economic growth.  

There are two types of R&D Tax reliefs:

• the Research and Development Expenditure Credit (RDEC) and
• the Small and Medium Enterprises (SME) R&D relief.

There was good news and bad news announced with the effective tax relief on RDEC claims increasing and the effective tax relief on SME claims decreasing.

Why is UK R&D Tax relief being reformed? 

The rationale behind this decision was that the RDEC scheme is seen by the Treasury as resulting in better value for the British tax payer. In addition to this, the RDEC rate was increased in order to make the relief more competitive internationally, with the intention of driving more growth in the UK.

According to HMRC’s latest statistics, in terms of volume of claims, RDEC claims made up just 11.73% of the total R&D claims in 2020-21.

But in terms of value of support received, RDEC claims made up over 36% of the total support claimed, with an average claim of £229,117 per company compared to the average SME claim of £53,283 per company.  

How will this affect companies claiming under RDEC?

For those claiming under the RDEC scheme, for expenditure from 1 April 2023, the RDEC credit will increase from 13% to 20%. 

With the main Corporation Tax (CT) rate also going up from 19% to 25% from 1 April 2023, this will mean the effective relief per £1 of qualifying expenditure will rise from 10.53p to 15p. 

There will be a transitional period for all companies, except those with March year ends due to the change in CT rates.

The rate change will create a hybrid CT rate, meaning these companies will see effective rates of relief between:

• 10.93p for April 2023 year ends, and
• 14.65p for February 2024 year ends,

with the full benefit of the 15p per £1 of qualifying expenditure only being enjoyed for 31 March 2024 year ends and onwards.  

What about for SME’s claiming under RDEC?

From 1 April 2023, SMEs with profits under £50,000 will only be taxed at the lower CT rate of 19%.

Such companies claiming under the RDEC scheme will (from years ending 31 March 2024 onwards) benefit from an effective relief of 16.2p per £1 of qualifying expenditure. 

Where there was once a large disparity between schemes, this rate compares more favourably with the future SME claims rates of:

• 18.6p (reduced from 33.35p) for loss making companies, and
• 21.5p (reduced from 24.7p) for profitable companies.

This fits in with the Government’s intention of streamlining all R&D claims into one scheme in the future.  

There are several other important changes to R&D Tax Credits which you can read about here 

In terms of receiving refunds from RDEC claims, it is important to note that HMRC is not governed by the 28-day turnaround time they quote for processing SME claims, so bear this in mind when thinking about cash flow. 

Further information

Check out HMRC's R&D Tax Credits statistics.

If you want to find out more about R&D Tax Relief and how this can benefit your business, head over to our R&D KnowledgeHub or contact a member of our R&D team.