What is the R&D expenditure credit?
Answered 17 March 2026
Here is a comprehensive explanation of the R&D Expenditure Credit (RDEC):
What the law says
Nature and overview
The R&D Expenditure Credit (RDEC) is a credit provided under Chapter 1A of Part 13 of CTA 2009 in respect of certain expenditure on research and development.
Entitlement
A company is entitled to an RDEC for an accounting period if it meets three conditions:
- Condition A: The company carries on a trade in the period.
- Condition B: The company incurs expenditure that is both (a) allowable as a deduction in calculating the profits of the trade for corporation tax purposes, and (b) qualifying Chapter 1A expenditure under ss.1042D, 1042E or 1042F.
- Condition C: The company is not an ineligible company (see s.1142).
Qualifying expenditure
For in-house R&D (s.1042D), expenditure qualifies if it is attributable to relevant R&D undertaken by the company itself and is incurred on:
- staffing costs (s.1123);
- software, data licences, cloud computing services or consumable items (s.1125);
- qualifying expenditure on externally provided workers (s.1127); or
- relevant payments to the subjects of a clinical trial (s.1140).
There is also a category for expenditure as a contractor for an "irrelievable client" (s.1042F), where the R&D is contracted out to the company by an ineligible company or a person not acting in the course of a trade within the charge to tax.
Rate of credit
The relevant percentage of qualifying expenditure translated into the credit is:
- 49% for a ring fence trade (within the meaning of s.277 CTA 2010); or
- 20% in any other case.
The Treasury may by regulations replace either percentage.
Tax treatment
If a company is entitled to and claims an RDEC, it must bring the amount of the credit into account as a taxable receipt in calculating the profits of the trade for corporation tax purposes.
Claiming
To obtain the credit, the company must make a claim under Part 9A of Schedule 18 to FA 1998. From April 2023, there are restrictions on late claims unless the company has made a prior R&D claim within three years, or has made a claim notification within the claim notification period.
HMRC guidance / practice
Background and purpose
RDEC was introduced by Finance Act 2013 as a stand-alone credit for large companies incurring R&D expenditure on or after 1 April 2013. It replaced the previous large company enhanced deduction scheme (which was abolished from 1 April 2016). The RDEC scheme does not alter how qualifying activity is identified or how qualifying expenditure is calculated — only the method of giving the relief changed.
Who can claim
RDEC is primarily given to large companies carrying out qualifying R&D. However, SMEs can also claim RDEC in the same circumstances as they could previously claim under the large company scheme (e.g. where they receive a subsidy or where the R&D is contracted out to them by a large company).
How the credit works in practice
The RDEC is a stand-alone credit brought into account as a taxable receipt in calculating the profits of the trade. For profit-making companies, the RDEC discharges corporation tax that the company would otherwise have to pay. Companies with no corporation tax liability benefit from the RDEC through either a cash payment or a reduction of tax or other duties due.
The payment steps (s.1042I)
The credit is worked through a series of steps:
- Step 1: Applied to discharge the company's corporation tax liability for the period.
- Step 2: Any remainder is capped at the net value of the credit (i.e. after deducting the main rate of corporation tax on the credit amount).
- Step 3: Any remainder is further capped by the company's total expenditure on workers (PAYE/NIC cap); any excess is carried forward to the next accounting period.
- Step 4: The remainder is applied to discharge corporation tax for any other accounting period.
- Further steps can result in a cash payment to the company.
New RDEC (from April 2023)
Following reforms, there is now a single set of rules for claimants of any size. The new RDEC remains a taxable credit (deemed trading income) calculated as a percentage of qualifying R&D expenditure. Key changes include: a lower notional tax restriction at Step 2 for small profit-makers and loss-makers; a more generous PAYE cap at Step 3; and expenditure on contributions for independent R&D can no longer be claimed. Generally, claimants can claim for R&D contracted out by them, but cannot claim for R&D contracted out to them.
Citation sources
Finance Act 2013 introduced a stand-alone credit to be brought into account as a receipt in calculating the profits of large companies for research and development (R&D) expenditure incurred on or after 1 April 2013 known as the Research and Development expenditure credit (RDEC). The RDEC scheme does not alter the way qualifying activity is identified or how qualifying expenditure is calculated. It is only the method of giving the relief that has changed. The legislation is contained at CTA2009
ensure that no enhanced Relief is given indirectly to what is, in economic substance, the expenditure of large companies who contract out work to SMEs. Its function is not to ensure that if it denies relief to one party, another party gets the relief; (3) the legislation does not provide that there must always be a claim by someone for expenditure qualifying as R&D Expenditure. The right to claim enhanced R&D relief in respect of R&D expenditure is heavily circumscribed and it is evident that no
There is a single set of rules for claimants of any size The new RDEC remains a taxable credit (deemed trading income) calculated as a percentage of qualifying R&D expenditure The calculation and the payment steps are broadly similar to the old RDEC scheme, however: a lower rate of notional tax restriction at step 2 of the payment steps is available to small profit-makers and to loss-makers (see CIRD112100) a more generous PAYE cap applies at step 3 (see CIRD140000) Expenditure on contributions
Part 13 ... expenditure on research and development Chapter 1A R&D expenditure credit Introductory Overview of Chapter 1042A 1 This Chapter provides an entitlement to a credit (called an “R&D expenditure credit”) in respect of certain expenditure on research and development. 2 Section 1042B and 1042C make the basic provision setting out what the entitlement is and how it is to be realised. 3 Sections 1042D to 1042F describe the expenditure by reference to which the entitlement arises. 4 Section
r 2 £2m RDEC remaining (after discharging liability) £735,000 The £735,000 is the amount of payable credit remaining after discharging the corporation tax liability for the period first using the amount RDEC brought forward, then discharging the balance with the current year RDEC. STEP 2 If the amount remaining after step 1 is greater than the net value of the set-off amount that amount is to be reduced to the net value of the set-off amount. Compare the amount remaining after step 1 with the ne
Research & Development Expenditure Credits (RDEC) are given to large companies that are carrying out qualifying research and development (‘R&D’). (Chapter 6A Part 3 CTA 2009). The RDEC is a stand-alone credit that is brought into account as a taxable receipt in calculating the profits of large companies. The credit is a fixed percentage of the expenditure on qualifying R&D. For profit making companies, the RDEC discharges corporation tax that the company would have to pay. Companies with no corp
Part 13 ... expenditure on research and development Chapter 1A R&D expenditure credit Entitlement and claims Entitlement to credit 1042B 1 A company is entitled to an R&D expenditure credit for an accounting period if it meets conditions A, B and C in this section. 2 Condition A is that the company carries on a trade in the period. 3 Condition B is that the company incurs expenditure that is both— a allowable as a deduction in calculating for corporation tax purposes the profits of the trade for
Part 13 ... expenditure on research and development Chapter 1A R&D expenditure credit Rate of credit Percentage of qualifying expenditure translated into credit 1042G 1 The relevant percentage for the purposes of section 1042B (5) is— a 49%, in the case of a ring fence trade within the meaning given by section 277 of CTA 2010, or b 20%, in any other case. 2 The Treasury may by regulations replace the percentage for the time being specified in subsection (1) (a) or (b) with a different percentage
Part 13 ... expenditure on research and development Chapter 1A R&D expenditure credit Qualifying expenditure Qualifying expenditure: in-house R&D 1042D 1 Expenditure of a company is qualifying Chapter 1A expenditure if it meets each of conditions A to D in this section. 2 Condition A is that the expenditure is attributable to relevant research and development undertaken by the company itself. 3 Condition B is that the expenditure is— a incurred on staffing costs (see section 1123), b incurred on
Part 13 ... expenditure on research and development Chapter 1A R&D expenditure credit Treatment of credit: main provisions Expenditure credit to count as taxable receipt 1042H If a company is entitled to, and claims, an R&D expenditure credit for an accounting period, it must bring the amount of the credit into account as a receipt in calculating for corporation tax purposes the profits for the period of the trade concerned.