What Is the Research and Development Expenditure Credit (RDEC)?

The Research and Development Expenditure Credit (RDEC) is one of the main mechanisms through which UK companies can claim R&D tax relief. From April 2024, RDEC became the basis of a merged scheme that applies to most companies — both large companies and SMEs — with a retained enhanced scheme for highly R&D-intensive SMEs.

Background: The Pre-April 2024 Position

Before April 2024, there were two separate R&D schemes. SMEs (fewer than 500 employees, turnover under €100m or balance sheet under €86m) used the SME scheme, which provided an enhanced deduction of 130% plus a cash credit for loss-making companies. Larger companies used RDEC, which provided a 13% taxable credit (from April 2023). Subcontracted R&D and subsidised expenditure generally had to go through RDEC rather than the SME scheme. From April 2024, both schemes merged into a single scheme based on RDEC principles.

The Merged Scheme: 20% RDEC Credit

Under the merged scheme (for accounting periods beginning on or after 1 April 2024): all qualifying companies claim a taxable credit of 20% of qualifying R&D expenditure. This credit is included in your taxable profits but offset against your Corporation Tax liability. The credit is calculated on qualifying expenditure and applied as a credit — not an enhanced deduction.

How the 20% Credit Works in Practice

Suppose your company incurs £500,000 of qualifying R&D expenditure. The RDEC credit is 20% = £100,000. This £100,000 is a taxable receipt — it increases your profits for CT purposes. The CT on that £100,000 at 25% is £25,000. Net benefit: £75,000 reduction in your CT liability (assuming you have sufficient CT to absorb it). Effective benefit rate: 15% of qualifying expenditure.

If You Are Loss-Making

If your company is loss-making and cannot absorb the RDEC credit against CT, you can still benefit. The credit is applied through a step-by-step process: offset against CT for the period; offset against other HMRC liabilities (PAYE, VAT); payable as cash to the company (subject to a PAYE cap). This ensures that even loss-making innovative companies receive a real economic benefit.

The PAYE Cap

The cash payable element of RDEC is capped at £20,000 plus 300% of the company's total PAYE and NI liability for the year. This prevents artificial schemes where companies claim RDEC on large R&D budgets with minimal UK employment. For most genuine R&D companies with UK staff, the cap is not restrictive.

SME Intensive Scheme

R&D-intensive SMEs — those where qualifying R&D expenditure is at least 30% of total company expenditure — can claim under an enhanced SME scheme. The credit is effectively 27% (an enhanced deduction of 86% plus a 10% credit), with a loss-making credit rate significantly higher than the standard RDEC.

Claiming RDEC

Claim via the CT600 and supplementary R&D report. Advance notification to HMRC is required if it is your first claim or you have not claimed in the previous 3 years — this must be done within 6 months of the accounting period end.