The UK Government introduced R&D tax credits to encourage businesses to invest in innovation. To make these credits available to businesses of varying sizes and to comply with rules on State Aid, they created two distinct schemes: the SME tax credit scheme in 2000 and large company scheme in 2002. In April 2013, the RDEC scheme was introduced and eventually replaced the large company scheme.
In this article, discover the advantages of the RDEC scheme that are not available to businesses that use other R&D tax credit schemes.
It can help businesses make future investment decisions
The RDEC scheme is an above-the-line credit, positively impacting financial KPIs like turnover and EBIT. This means that it is more visible to owners, managers, and investors. It addresses concerns that the previous large company scheme did not affect profitability, leading to a lack of positive impact on R&D decision-making.
Furthermore, RDEC forms a separate item in the accounts of a claiming company, whereas the SME credit is usually subsumed in the tax line. This means that RDEC is much more visible to investors, which can attract further interest and investment.
Cash credit for loss-making companies
The previous large company scheme (which ended on 1 April 2016) allowed for the enhancement of R&D expenditure, which often resulted in a reduction of taxable profit or the creation and increase of a tax loss. However, unless the loss could be applied against other profits (e.g. profits carried forward from a previous period, or in another company in the same group) claiming R&D tax relief did not result in an immediate cash benefit.
As a solution, the RDEC scheme introduced a payable credit for loss-making companies (dependent on specific requirements), meaning that even if a company does not have taxable profits, it can still realise the benefit from R&D tax credits by receiving a cash credit.
It makes R&D tax credits more predictable
R&D tax credits can be unpredictable, as the benefits depend on a company’s tax position. For example, if a business has losses brought forward from the previous tax period, an R&D tax credit claim may not provide an immediate cash benefit.
However, the RDEC scheme is more independent of a company’s tax position, making its benefits more predictable. This is especially beneficial for large companies but should also be considered by SMEs with grants or subcontracted R&D.
Get the most out of your R&D tax credit claim with Ayming
With over £900m in benefit received by UK clients, Ayming’s consultants are well-placed to guide you through this niche area of tax and help you find out if your business is eligible for R&D incentives.
Our technical experts and experienced tax specialists work together to ensure all eligible R&D activity is correctly identified and your claims are maximised. Contact us today to see how we can help you make the most of your R&D investment.