Tax Advice

How to calculate RDEC

31 May 2021

As a small or medium business, you may be able to apply for RDEC, the government’s Research and Development Expenditure Credit scheme provided you meet the qualifying criteria. 


To qualify, you must be carrying out certain categories of R&D in the fields of science and technology. These are detailed in the HMRC publication ‘Research and development tax relief’. If your research qualifies, you can claim 13 percent of your eligible R&D expenditure as a credit against tax liabilities or a cash sum, and you can claim for RDEC if your business is making a profit or a loss. 


You can find out more about eligible R&D expenditure in our article ‘A guide to research and development accounting’. Here, our small business accountants will walk you through how to calculate RDEC. 


Steps to calculate RDEC

To work out how much RDEC you will receive, you need to make a series of calculations related to your overall tax position. This is because RDEC is treated as taxable income and must be included in your overall calculations for tax


In this simplified example, we assume that your business has sales of £10,000 with cost of sales £5,000. 


  • Your gross profit after deducting cost of sales before including other expenditure is £5,000

  • Your qualifying R&D expenditure is £1,000

  • You will qualify for an RDEC grant of 13 percent of £1,000 = £130

  • Your other allowable business expenditure is £1,500

  • Your total operating costs are £1,000 (R&D) + £1,500 (other business costs) less £130 (RDEC) = £2,370 

  • Your net profit for calculating Corporation Tax is now £5,000 (gross profit) - £2,370 = £2,630 

  • Your Corporation Tax liability is £2,630 x 19 percent = £499.70


Here’s how it looks in a worked example:

Sales

£10,000

Cost of sales

(£5,000)

Gross profit

£5,000

Qualifying R&D expenditure

(£1,000)

RDEC grant - 13 percent of expenditure

£130

Other allowable business costs

(£1,500)

Total operating costs

(£2,370)

Net profit before tax

£2,630

Tax due at 19 percent

£499.70


However, you can use your RDEC grant to reduce your tax bill.


Deducting the RDEC grant of £130 from tax due of £499.70 leaves you with £369.70 to pay.


Here’s how that looks in a worked example:


Net profit before tax

£2,630

Tax due at 19 percent

£499.70

Less RDEC grant as a tax credit

£130



Tax payable

£369.70


RDEC calculation

Other scenarios 

As that simplified example shows, the RDEC grant can be used to reduce the amount of tax you pay if your business is making a profit.


You might also be able to use the RDEC grant to discharge other tax liabilities, such as VAT, National Insurance or unpaid tax from other years. 


However, if your business is making a loss or is a start-up with no current tax liability, you may be able to receive RDEC as a cash payment. The amount of RDEC you receive will also be based on your qualifying R&D expenditure at the same rate of 13 percent. 


The calculations become more complex if your business is part of a group or if you are carrying out qualifying R&D as a subcontractor. If you are part of a group, for example, you can elect to pass on your RDEC grant to the group to offset other tax liabilities.


In scenarios like this, it can be useful to take professional advice to find out which approach is most beneficial to your business. 

Support from Accounts and Legal

This is a brief outline of the requirements for calculating RDEC. If you would like to discuss the accounting needs for your RDEC project, our team of experienced small business accountants will be glad to help. 

To find out more, please contact us on 0207 043 4000 or via info@accountsandlegal.co.uk. You can also get an instant accounting quote using our online tool.  

Chris Barnard

photo

Head Accountant in Brighton

0127380 8000

About the author

Hello there! My name is Chris.

Since graduating with a business degree over 12 years ago I have been helping businesses grow, by sorting their finances and providing great advice. In 2014 I became a Chartered Certified accountant and have worked in various sized accountancy firms, from traditional top 20, to up and coming online accountants.

This resulted in 2015 being recognised in Accountancy Age's 35 under 35 and a year later in 2016 awarded the New Practitioner of Year, at the British Accountancy awards.

I specialise in helping fast growing businesses get a grip with their accounting, tax and financial processes. It can be a minefield, with an endless count of buzzwords and acronyms. 

I help drive efficiencies and business performance through the latest software, and face to face proactive support. Here are a few areas I can help you and your business:

- Help digitise business records in one central location. These are instantly accessible and you'll see a raft of benefits. 

- Deliver and explain business insights on how your business is performing against targets / previous performance

- Create business forecasts to help management cashflow issues or help get funding from a range stakeholders.

- Provide expert tax planning to  companies and individuals to ensure you never receive an unexpected bill from HMRC.

- Access to industry changes and developments before they are live

  

We can help you grasp opportunities

 

If you’re self-employed and thinking of starting a business, we can help plan ahead and get your accounts in order. We are full-service accountants offering tax and accounting support from bookkeeping to business plans, and payroll to tax-efficient investment advice.

 

Call us today or get an instant quote for our services!

 

Instante-Quote-Accounting