The RDEC Rate 2021/22: Explained
R&D Tax Credits 4 mins read 08th Apr 2021
The RDEC rate is the most important factor in calculating the return on R&D investment. Knowing how changes to the RDEC rate could affect your claim, will ensure your return is maximised.
The RDEC rate is an essential tool for the government to incentivise the private sector to invest in R&D. usually in the spotlight around every annual Budget as it plays an important role in the economy. UK companies are wise to try and anticipate any changes to the rate as it will determine the reward value from R&D investment.
Learning everything you can about the RDEC rate and how it can change over time can help you plan financial decisions more effectively, whether you’re actively investing in R&D or planning to do so in the future.
What is the RDEC Rate?
Let’s start off by getting a better understanding of the basics.
The Research and Development Expenditure Credit (RDEC) rate determines the value of the credit rewarded for qualifying R&D expenditure under the RDEC scheme. An incentive that can be claimed by Large Companies and some SMEs claiming state aid for the R&D project.
An RDEC is the reward for R&D investment. It is calculated as a percentage of the qualifying expenditure that occurred when solving technical or scientific uncertainties.
Currently, the RDEC rate remains at 13% for the financial year beginning 1 April 2021. From 1st April 2020, the rate was increased from 12% to 13%.
However, because it is subject to corporation tax (19%), after deduction, eligible companies will end up benefitting up to 10.5% on qualifying R&D expenditure.
Changes to the RDEC Rate
The government recognises the value of R&D and set an ambitious target to increase the UK’s total R&D expenditure to 2.4% of GDP (1.7% in 2018).
The RDEC rate has been increasing over time and will probably continue to rise. Although there were no recent announcements, there is a trend that may indicate a potential increase in the future. When looking at the changes over time, the R&D tax credits rate (especially the RDEC rate) has been growing over the years.
|SME Payable Credit||11%||14.5%||14.5%||14.5%||14.5%||14.5%||14.5%||14.5%||14.5%|
|SME Enhanced Rate||225%||225%||230%||230%||230%||230%||230%||230%||230%|
Last financial period, there were 8,000 RDEC claims that secured £2.8bn and the number of claims increased annually. Although the volume of claims under the SME scheme is larger than the RDEC scheme, and the RDEC rate is less beneficial than the SME scheme, a similar proportion of the benefit is claimed.
The RDEC rate tends to be increased every couple of years. But the SME scheme rate hasn’t changed for over 7 years now, so it’s possible it could be next in line for a review.
Nevertheless, there is currently an ongoing discussion about simplifying R&D Tax Relief by merging the two schemes into a single coherent system. This would potentially affect the RDEC rate and the way claims are calculated for individual businesses.
Effective RDEC Rate
One of the distinctive differences between SME and RDEC schemes is the effective return from R&D investment. The RDEC scheme is subject to corporation tax (19%) so the actual benefit after corporation tax offset is 10.53% (i.e. 13% x 81/100).
From 1st April 2023, the corporation tax will rise to 25% for companies exceeding £250,000 profit. The standard rate of 19% will remain for profits not exceeding £50,000.
Essentially, companies claiming RDEC in the future will receive less benefit from their investment. If the RDEC rate was to remain the same, the effective rate would be 9.75% (i.e. 13% x 75/100).
With the increase in corporation tax, the reward will be lowered for companies claiming under the RDEC scheme. For example, when claiming £1,000,000 qualifying R&D spend, the reward would be decreased by £7,500.
To ensure the UK remains a competitive and attractive place for innovative businesses, and for businesses to remain leaders in their own sectors, it’s possible that the government will raise the RDEC rate to balance out the benefit.
This is important because understanding the effect of the upcoming changes to the rate enables qualifying companies to plan their R&D spend more effectively.
Reasons behind increasing RDEC rate?
According to the latest UK innovation survey, 38% of UK businesses were innovation active, of which most were large businesses. R&D expenditure continues to increase and in 2018 represented 1.7% of gross domestic product.
“Increasing the amount of R&D carried out by companies is a key part of the government’s aim to increase productivity and promote growth.”
The government pledged to increase spending on innovation to reach 2.4% of GDP and encourage more companies to undertake R&D. They clarified that maintaining focus on innovation plays an important role in supporting productivity, employment and economic growth.
Companies investing more in R&D and getting more back can often result in greater job creation and overall support of the economy. In 2019, total UK business employment in R&D grew by 11,000 to 263,000 full-time equivalents, an increase of 4.4% since 2018.
Raising the RDEC rate can boost R&D investment in the private sector and encourage more companies to start undertaking R&D. Companies considering an R&D project would benefit from knowing the RDEC rate and calculating the return from that investment.
RDEC vs SME Scheme Rates
Because the SME R&D tax credits scheme offers such a generous benefit, it is considered state aid. The SME scheme is currently offering up to 33% back on qualifying R&D expenditure, 22.5% more than the RDEC rate.
SMEs considering undertaking grant funding may want to carefully consider when to apply as it could affect the return from R&D investment. With careful planning, a company can navigate the schemes to ensure they do not miss out on R&D tax relief that they would be entitled to claim.
If you need advice on how you can get the most out of your R&D tax claim or need advice on how to benefit from RDEC as an SME, get in touch with one of our R&D tax specialists for a free no obligation consultation.