Research and development tax update - RDEC

Enhance tax relief for qualifying R&D expenditure has been a feature of the UK tax system for companies since its introduction in 2000 for small and medium- sized enterprises (”SME”s) and 2002 for large companies. A company is large if it has annual turnover of over €100 million, and a balance sheet exceeding €86 million.

April 2016 saw the Research & Development Enhanced Credit (RDEC) become the only route available for large companies to claim relief for their R&D expenditure in the UK.

What is R&D?

The relief enables companies to claim an enhanced tax deduction for expenditure on “Qualifying Research and Development Activity”.

Qualifying activity for this purpose is work carried out on a new or improved product or process, which resolves a scientific or technological uncertainty, provided the solution is not available to, or readily deducible by a competent professional working in the field.

Qualifying expenditure includes staff costs, payments made for the services of subcontractors or personnel supplied by other group companies, consumable items including materials utilised in the R&D process, software licenses and utilities, and payments to qualifying bodies.

The“Old” Regime

The Under the previous regime for large companies, the relief was only practically of use to companies with taxable profits in the UK, as there was no repayable credit attached to the deduction. Those with unused trading losses would see no immediate benefit and so many chose not to prepare a claim.

Also, for overseas parented groups with UK subsidiaries, the benefit of the old style R&D relief claim was often offset by a loss of double taxation relief at the parent company level, making claims unpopular.

RDEC - What’s new

Companies making an RDEC claim can record an ‘Above the Line’ taxable credit calculated as 11% of their qualifying R&D spend. A net 8.8% cash benefit is delivered to the bottom line after accounting for UK corporation tax at the current rate of 20%. The credit can then be offset against existing tax liabilities or, if there are no tax liabilities, can be recovered as a cash payment from HMRC.

Because RDEC involves the credit being available for offset against other duties, or being payable as a cash sum where no liabilities exist, large companies with taxable losses can now obtain a cash flow benefit from claiming the relief.

Also, from April 2016 companies where the cost centre for R&D work is in the UK, but whose profit centres are overseas, can now receive a cash-based benefit on their qualifying activities, without complications that previously may have arisen with regard to effective tax rate