USA
R&D expenditure credit (RDEC) explained
For a large company relief is given as an ‘above the line’ expenditure credit that is calculated as a percentage of the qualifying expenditure for the relevant accounting period. The R&D expenditure credit (RDEC) is treated as income, positively impacting EBITDA and increasing a company’s taxable profits. RDEC is claimable by large companies, or SMEs undertaking subsidised R&D and projects contracted to them by large companies.
Large company classification
A company is generally classified as large if one or more of the criteria below are satisfied (at a group level):
- Total staff of more than 500 people
- Turnover of greater than €100 million or balance sheet assets greater than €86 million
What costs qualify for R&D relief?
- Staffing costs (including gross salaries, wages, overtime pay, and cash bonuses), employer national insurance contributions, and employer pension contributions
- Costs of externally provided workers (EPWs), which are the staff costs paid to an external agency for staff who are directly and actively engaged in the R&D project. EPWs must carry out R&D activities under the supervision, direction, or control of the claiming company and the work should not constitute the contracting out of R&D activities. Only 65% of the total EPW costs can qualify for R&D relief, assuming the staff provider is unconnected.
- Consumables, which are materials that are consumed or transformed in the R&D process. These include utilities such as water, fuel, and power
- Software, including the cost of software licences utilised in the R&D activities
- For accounting periods beginning on or after 1 April 2023, data licences and cloud computing utilised in the R&D activities
How are benefits calculated?
From 1 April 2023 the RDEC rate and corporation tax rates are changing and therefore the net benefit receivable by companies will change.
|
|
RDEC Rate |
Corporation Tax Rate |
|
Before 1 April 2023 |
13% |
19% |
|
After 1 April 2023 |
20% |
19% - 25% |
From 1 April 2023 companies with profits lower than £250,000 can claim Marginal Relief which will result in a marginal rate of tax between 19% and 25%.
Worked example
|
|
|
Before 1 April 2023 |
After 1 April 2023 (companies with projects greater than £250,000) |
|
Qualifying R&D expenditure |
= |
£1,000,000 |
£1,000,000 |
|
RDEC |
=
= |
13% x £1,000,000
£130,000 |
20% x £1,000,000
£200,000 |
|
The RDEC is treated as income and is therefore taxable. |
|||
|
CT paid on RDEC |
=
=
= |
RDEC x CT Rate
£130,000 x 19%
£24,700 |
RDEC x CT Rate
200,000 x 25%
£50,000 |
|
Net benefit of RDEC |
=
=
= |
RDEC - RDEC CT liability
£130,000 - £24,700
£105,300 |
RDEC – RDEC CT liability
200,000 - £50,000
£150,000 |
|
RDEC net benefit |
= |
10.53% of initial qualifying R&D expenditure |
15% of initial qualifying R&D expenditure |