When working out how to account for R&D tax credits a lot will be dependent on which R&D tax credit scheme you are claiming under. The SME R&D tax credit is treated as an 86% tax deduction (before April 1st 2023 it was 130%) in the computation. The RDEC tax credit is treated as income (currently 20%) in the income statement.
R&D Tax Credits and Research and Development Expenditure Credits (RDEC)
Working out how to account for R&D tax credits differs depending on the size of your organisation and the nature of the project being carried out.
This is due to the difference in benefits offered by the schemes designed to help SMEs (via the SME R&D Relief) and RDEC which was introduced to help large companies as well as those subcontracted to carry out R&D work for large companies (both large and SMEs). You could likely be eligible to claim under both schemes as long as the R&D credit criteria are met.
For further information regarding the two, please refer to our .
This can, unfortunately, be a complicated process, which is why CapEx Associates provides a dedicated service to assist businesses in their R&D tax credit application and unlock further potential capital. Get in touch with us today for more information on how to account for R&D tax credits.
How To Record R&D Tax Credits In Accounts
With a time limit of two years from the tax year to recoup R&D costs, a retrospective claim under both schemes, and a one-year reporting interval for company accounts, your award may likely be received before or after these documents are prepared. Therefore, we have set out some guidelines to help you in producing your company accounts.Main Differences to Note Between R&D Tax Credits and RDEC:
- R&D credits are recognised below the line in accounts, meaning that they are non-taxable and only affect the tax you pay. This is to be presented in your income statement or profit and loss account as either a corporation tax reduction or credit.
- Research and Development Expenditure Credit (RDEC) is accounted for as above-the-line, taxable income in comparison and can increase your profit before tax.
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How To Account For R&D Tax Credits For SMEs:
Under the SME scheme, the accounting R&D tax credit is said to be a “below-the-line” benefit. That means that the 86% R&D relief on your qualifying expenditures is deducted from your corporation tax computation. The tax due on the adjusted profit is then shown in your income statement, which tracks profits and losses.
Did you know that if your claim is…
- Received before finalising your accounts – you can simply include the amount you are awarded into your cooperation tax.
- Received after your accounts are finalised – complete a prior year adjustment for the year that the claim was made.
Double Entry Bookkeeping Accounting R&D Tax Credits For SMEs
The instructions below outline how to complete your accounting R&D credits for SMEs.
- To account for your pre-R&D tax charge: Debtor – Corporation tax charge (income statement) Creditor – Corporation Tax (balance sheet)
- To reduce your tax charge to include your R&D claim: Debtor – Corporation Tax (balance sheet) Creditor – Corporation tax charge (income statement)
- If you have received a tax refund: Debtor – Bank (balance sheet) Creditor – Corporation Tax (balance sheet) Awaiting a tax credit: Debtor – Corporation Tax (balance sheet) Creditor – Corporation tax charge (income statement)
- Received credit from HMRC: Debtor – Bank (balance sheet)
Accounting R&D Tax Credit Under The RDEC Scheme
The accounting R&D tax credit for RDEC is slightly different. The RDEC tax credit is commonly referred to as an “above-the-line” or ATL tax credit. That is because it is treated as grant income for accounting purposes. Above-the-line tax credits can increase your accounting profits or decrease accounting losses. Also, the fact that it is an above-the-line credit means that it will be taxed.
As RDEC is a taxable income, there are two ways in which it can be included in your company accounts. One is to regard your claim as other income, whilst the other is to deduct the sum from your R&D expenditure.
This may be something that you might wish to consult with your auditor or accountant. Please note, that this example does not demonstrate how you can deduct your claim from your R&D costs and explain the latter.
Adding the RDEC:
Debtor – Corporation Tax (balance sheet)
Debtor – Corporation tax charge (income statement)
Creditor – Other income (income statement)
You will need to add the pre-tax RDEC value above the line as other income and the tax payable within the tax line of your P+L document.
If you receive a cash RDEC payment:
Debtor – Bank (balance sheet)
Creditor – Corporation Tax (balance sheet)
If you would like some support with your RDEC or R&D tax credit application, please get in touch today.
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How To Account For R&D Qualifying Costs
R&D costs are classified as internal. Intangible assets, and so they are governed by a specific set of UK accounting standards (SSAP13/FRS102.)
SSAP13 states that R&D costs should be written off to the income statement as an expense, therefore either reducing accounting profit or increasing accounting losses.
Usually, tangible assets are capitalised to the balance sheet and depreciated over time. That is because they have enduring value to the business (e.g. fixed assets or long-term investments.)
Expenses, on the other hand, are written off to the income statement where they will decrease accounting profit or increase the accounting loss.
CapEx Tax specialists can aid you with finding more information on how to account for R&D tax credits and make the process easier for you and your business. Get in touch today to see how we can help and support you.
