The Research and Development Expenditure Credit (RDEC) scheme is a valuable financial incentive for UK businesses. However, many companies are unaware of what costs they can claim back, leaving crucial funds on the table. This guide aims to clarify what expenditures are eligible under RDEC and how businesses can maximise their returns.
Before delving into the specifics, it’s essential to understand who qualifies for RDEC. Generally, companies with over 500 employees, a turnover of over €100 million, and/or a balance sheet exceeding €86 million are eligible. These firms are considered “large companies” in accordance with EU definitions.
Even though RDEC is generally aimed at larger organisations, small and medium enterprises (SMEs) that subcontract R&D work to larger companies can also benefit. SMEs may claim under RDEC for certain projects that don’t qualify for SME R&D tax credits.
Direct R&D Costs
Staffing is often the most significant direct cost associated with R&D activities. Salaries, wages, Class 1 National Insurance contributions, and pension contributions all fall under claimable expenses. When making an RDEC claim, you can include these staff costs proportionate to the time they spent on R&D activities.
Consumable items like materials and utilities are another area where businesses can recover costs. Be sure to keep meticulous records as these expenses must be directly attributable to R&D activities. Buzzacott accounting firm emphasises the importance of documentation in securing a successful RDEC claim.
Unlike the SME scheme, RDEC allows for the recovery of some overheads. You can claim costs like utilities as long as they’re apportioned correctly to the R&D activity. For example, if 20% of your workspace is dedicated to R&D, then a similar percentage of the rent could be included in your claim.
The Claim Process
Start by identifying R&D projects and their associated costs. It’s crucial to maintain meticulous records, including invoices, timesheets, and any other documentation that can substantiate your claim. The HM Revenue & Customs (HMRC) provides specific guidelines on what you need to prepare.
Once you have gathered all the necessary information, file your claim through your Company Tax Return (CTR). You should do this within two years from the end of the accounting period in which the expenditure occurred. Failure to do so could mean forfeiting your claim.
When it comes to RDEC, a lack of proper record-keeping is often the main issue. Being hasty and failing to document the direct link between costs and R&D activities can lead to claim rejections. Businesses must adhere to HMRC regulations and provide all required supporting evidence.
Another potential pitfall is misunderstanding what constitutes R&D according to HMRC definitions. Businesses sometimes incorrectly assume that any innovative activity can be claimed for, which leads to unsuccessful claims. It’s vital to familiarise yourself with HMRC’s criteria to ensure you’re legitimately eligible.
Understanding what costs are recoverable under the RDEC scheme can be a game-changer for British businesses. It’s not just about knowing the types of costs that can be claimed but also understanding the process, the documentation required, and the common pitfalls to avoid.