What is the accounting treatment for R&D tax credits?
The accounting treatment for R&D tax credits depends on the specific scheme under which they are claimed. The different schemes are:
- The SME tax scheme for R&D
- The RDEC accounting scheme (Research and Development Expenditure Credit)
- A combination of the SME and RDEC schemes (‘Merged Scheme’)
Your business needs to maintain accurate accounting for R&D tax credits — as failure to do so may lead to inaccurate financial statements, non-compliance and possible tax penalties. You may even lose out on a great deal of tax relief.
In this article, we’ll introduce all of the different schemes, so that you will know how to achieve the proper accounting treatment for your circumstances.
Before you read on: We specialise in R&D consulting with businesses just like yours, no matter what industry you’re operating in. We will ensure a precise and thoroughly documented claim, so HMRC will be unlikely to challenge you. And in the unlikely event they do, we will provide all the necessary documentation to ensure a resolution. We have a very high success rate with average claim sizes of £50,000. Visit our R&D tax credit calculator page here, and our guide on all things to do with R&D tax credits here.
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What is the process of accounting for R&D tax credits for SMEs?
It’s very straightforward. Your R&D tax credit is not taxable income. It is a below-the-line benefit. It appears on your income statement (or profit-and-loss account) as a credit or a Corporation Tax reduction.
You can estimate your R&D tax credits when calculating your Corporation Tax before finalising your accounts. But you’ll need to adjust your Corporation Tax to reflect the precise amount once you receive your official claim.
You can also adjust the amount later as a prior year adjustment, as Corporation Tax returns are usually filed after your accounts — and R&D tax credit claims are usually processed retrospectively.
What is the double entry accounting for SME R&D tax credits?
Since your SME R&D tax credit is a below-the-line benefit, it directly reduces your Corporation Tax rate. This reduction will be visible in your income statement and Corporation Tax creditor account.
To post your pre-R&D claim tax charge to the accounts: |
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To reduce your tax charge to reflect your R&D claim: |
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Then, when you are receiving, if you receive a refund of the tax paid: |
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Alternatively, if you are expecting a tax credit: |
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Then, when you receive the credit from HMRC: |
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RDEC accounting: What is the accounting treatment process for RDEC?
The credit you receive when making an RDEC accounting claim is taxable income (as opposed to the SME scheme, which isn’t taxable).
RDEC credit can be included in the calculations of your company’s operational profits before tax. It’s like adding income to your top line of revenue. You can show RDEC accounting as ‘other income’ on your income statement, though this isn’t compulsory.
You can finalise your RDEC claim calculation early enough to show an accurate figure — or include a reliable estimate — in your accounts. You can adjust the claim in the following year’s accounts if necessary.
However, if your R&D expenditure is deferred to the balance sheet, the accounting rules will be different.
What is the double-entry accounting period for RDEC?
RDEC is taxable income and is shown above-the-line in your accounts. So the double entry accounting for this is different from the SME R&D tax credit scheme accounting treatment.
You can therefore disclose RDEC in the following ways:
- As extra income in your financial statements.
- You could deduct it from the amount you spent on R&D — if you show this expense separately.
To post the RDEC: |
You should post the gross value of the RDEC above-the-line (other income) in the tax line of your income statement. Along with the tax payable on this. |
If you receive a cash RDEC payment: |
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Remember, if you capitalise your R&D costs, the accounting will be different from the above.
RDEC accounting: What is the accounting treatment process for RDEC?
If you are new to the Merged Scheme then knowing how to account for R&D tax credits may seem more complicated the first time you do it.
This is because there are two ways to go about it. You can treat your R&D tax relief as either:
- A reduction in your payable tax, which will offset the tax liability.
- A government grant — in which your credits will be treated as profitable income, reducing the costs of long-term projects.
Given the flexibility in handling R&D tax credits, any future project planning should include an evaluation of these different accounting approaches, so that they best suit your interests.
What are the benefits of proper accounting treatments for R&D tax relief?
The benefits of properly accounting for R&D tax credits are enormous, including:
- Clear presentation of your finances: This will make it easier to showcase your business to investors, regulators and lenders. Helping you to build trust and confidence.
- Improved cash flow: Get a grip on your R&D accounting and you may be able to lower taxable profits and increase your revenue, which can then be reinvested in future projects or ongoing innovation.
- Reduces risk & ensures compliance: Properly accounting in line with HMRC guidelines will reduce the risk of any potential penalties.
Case study: Read more about how we helped a data analytics company regarding compliance issues and dealing with HRMC here.
There are no downsides to proper accounting for R&D tax credits. They will help you make the most of what your business has earned and keep it in a strong position.
What are the benefits of proper accounting treatments for R&D tax relief?
In our experience, many accountants for businesses all over the UK are too inexperienced to account for R&D tax credits. Common mistakes include:
- Being too inexperienced and putting the business at risk of an audit or HMRC penalties. There is a lot of technical jargon and complex rules with the accounting standards here.
- Taking a huge amount of your business’s time and resources trying to learn and properly account for the credits.
- Being unable to identify what qualifies for R&D activities.
- Failing to claim back the maximum amount your business is entitled to.
- Failing to claim back at the right time.
R&D tax is heading into a period of stability and growth as the Government pledges investment in innovation. Following the 2024 Autumn Budget, in which the Chancellor pledged a continuation of the scheme with targeted funding, R&D tax claims look set to continue rising in the coming years. Find out how much R&D tax relief you could be owed with our free R&D claim calculation tool here. Let RanddUK help you with proper accounting for R&D tax credits. We offer FREE initial advice and operate on a no-win, no-fee basis.
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Conclusion: How to avoid mistakes and enjoy successful accounting treatment for R&D tax relief.
We recommend the following steps for a smooth accounting treatment process:
- Actively maintain detailed documentation. Having all the right documents will provide ample support for your claim. And you’ll be able to refer back to them easily when developing your financial statements.
- Strategically implement timelines for tax relief submission. Do this to avoid being out as the financial statement deadlines come around.
- Consider working with R&D tax specialists to help your finance team. A good team of R&D tax credit specialists will provide you with the knowledge to make accurate claims. Work with us, and we’ll have your back in case of an HMRC dispute.
Of course, this is all easier said than done. There’s a good chance that, without expert help, your finance team will struggle. Bringing in expert help will save you more money and put your business on a secure footing going forwards. Read more: Working with an R&D tax advisory as an accountancy partner.
Maximise your claim with randdUK, your genuine R&D tax credit specialist team.
Don’t waste time with inexperienced finance teams.
When it comes to R&D activities, most accountants and tax management teams — in-house, external or otherwise — lack the time or specialist knowledge to navigate the complexities of the R&D tax credit scheme.
We couldn’t be more different. We will make sure you never miss an R&D claim deadline and put together a watertight claims process that will minimise the chances of HMRC enquiries.
And in the event that HMRC does challenge a claim, we’ll stick with you and take the lead in dealing with HMRC until the case is resolved.
Claim up to 9x more with randdUK’s tax specialists for an average R&D tax relief claim of £50,000. Start the process today.