The RDEC is intended to encourage spending on R&D activities by addressing two issues from the existing large company regime, the first of which may be of particular relevance for insurance groups who may not have made R&D tax relief claims due to existing tax losses either eliminating the potential benefits or moving the benefits a long way into the future:
- A cash repayment is now available for loss making companies (subject to a number of intermediary steps before cash is actually repaid), where historically additional tax losses would have arisen that may not have had value for a number of years.
- If the income is recognised “above the line” this should increase EBITDA and as such should be more visible to R&D teams.
The RDEC regime is elective and runs in parallel to the existing regime for large companies until April 2016.
The RDEC is payable at a rate of 10% (increased from the original announcement of 9.1%) on qualifying R&D expenditure. The gross RDEC is then taxable, giving rise to a net tax benefit dependent on the corporation tax rate for the year, as in the table below.
The RDEC is ultimately convertible to cash, subject to detailed offset provisions against corporation and other taxes and an R&D staff costs PAYE/ NIC cap.
In the 2013 Budget, the Government increased the rate of the new R&D credit to 10% of qualifying expenditure, before tax is deducted. The net of tax benefit rises to 8% by 2016, compared to the falling benefit of the existing 130% enhanced deduction regime, as set out in the table below. This gives companies additional incentive to elect into the new regime early.
||Net tax benefit
|Net tax benefit |
(existing regime - enhanced deduction)
A further significant change in the legislation was announced post Budget 2013 where, following representations, the Government increased the scope of the PAYE/NICs cap on the payable credit in two important ways:
- It will now take into account the full PAYE/NICs of a company’s R&D staff within the claim, even if they do not work full time on the R&D.
- It will now add the PAYE/NIC costs of externally provided workers (EPWs) from a group company that relate to qualifying expenditure in the claim.
However, third party EPWs’ PAYE/NIC will not count towards the cap nor will group employees of overseas companies.
Consider whether you qualify as a large company, for R&D purposes this means 500 or more employees and either turnover more than €100m or gross assets more than €86m.
Assess what projects may qualify, remembering that the tax definition of R&D is much wider than you may think and includes IT software and infrastructure development.
Quantify the value of potential claims by identifying R&D costs in the most cost efficient way. For life insurance groups the benefit of the claim may be different depending on whether expenditure is incurred in the life company, service company, or elsewhere.