Fergus WatsonR&D Senior Financial Consultant

Having started out at one of the Big Four accountancy practices for several years, Fergus has extensive experience with R&D tax claims.

The accounting treatment can differ depending on which scheme your company falls into. There are currently two UK Government R&D tax credit incentives on offer, promoting investment in innovation; SME R&D Tax Credits and Research and Development Expenditure Credit (RDEC).

How to account for R&D tax credits for SMEs

The accounting treatment for the SME R&D tax relief scheme is relatively simple: the credits are non-taxable, so they only impact your tax charge.

As a ‘below-the-line’ benefit, any relief will show in your income statement either as a reduction in Corporation Tax or a credit – see double-entry examples below. If you calculate your claim before filing your accounts, you should adjust your accounts to reflect the R&D claim. If not, you can use an estimate.

If you’re not sure what your R&D tax credit is worth until your accounts are finalised, you can include a prior-year adjustment after HMRC processes your claim.

Double-entry accounting for SME relief

As this SME relief reduces your tax liability (hence below-the-line relief), it should be reflected in the tax line of your profit-and-loss (P&L) statement.

Here is an example of double-entry accounting for SME relief:

  • Dr (debit) – Total CT (Corporation Tax), to the balance sheet
  • Cr (credit) – Additional CT, to the P&L

And when the SME relief is received from HMRC:

  • Dr – Bank, to the balance sheet
  • Cr – Total CT, to the balance sheet

The accounting treatment for RDEC

It’s a little more complex if you’re claiming Research & Development expenditure credit (RDEC). The RDEC incentives were established to support large companies (although SMEs can use it in certain circumstances, usually where grants and/or subsidies have been received). To fall into the RDEC scheme, a company will have 500 or more staff, and either more than €100 million in turnover or €86 million in gross assets. The RDEC tax credits have been gradually rising in their relief-rate benefit over the years; they are currently worth 13% of a business’s qualifying R&D expenditure – this has increased from 12% in the Spring 2020 budget.

The RDEC tax credit is taxable at the normal Corporation Tax Rate (19%), and you should show it as income when calculating your pre-tax profit – this is why the RDEC relief is sometimes referred to as “above-the-line” credit.

Double-entry accounting for RDEC relief

Where RDEC is classed as taxable income, the double-entry accounting process is different.

Below is a basic example:

  • Dr – Total CT, to the balance sheet
  • Dr – Additional CT payable, to the P&L
  • Cr – Other income, to the P&L

When the RDEC payment has been received from HMRC, it can be posted as:

  • Dr – Bank, to the balance sheet
  • Cr – Total CT, to the P&L

Bear in mind that these are very basic examples to give you an idea of how accounting for RDEC relief can work. The actual process will vary depending on factors such as the amount you’re claiming and whether you’re benefitting from a refund or reduction.

In reality, it’s always best to work with a specialist R&D tax credit advisor to ensure everything is recorded and reported in your accounts exactly as it should be.