How to account for R&D tax credits

If your company is working towards a unique advance in science and technology, you may be able to claim research and development (R&D) tax credits.

The way these are treated in your accounts will be different depending on the type of scheme you claim under.

RDEC vs SME R&D relief

There are two main R&D schemes for businesses: the SME scheme and the R&D expenditure credit (RDEC).

The SME scheme offers a 130% deduction of qualifying R&D costs from your company’s yearly profit, on top of your usual 100% deduction.

To apply under the SME scheme, your company must:

  • have 500 employees or less
  • have a turnover which is less than €100 million or a balance sheet less than €86 million.

It must also meet eligibility requirements relating to external investment, connected companies and notifiable state aid. You cannot claim the SME scheme if you’re carrying out R&D as subcontracted work for a large company.
If your business is not eligible for the SME R&D scheme, you may be able to claim the RDEC instead. This credit is calculated at 13% of your company’s qualifying expenditure.

Accounting for SME R&D tax relief

SME R&D tax credits are not classed as taxable income. They are treated as a ‘below-the-line’ benefit, appearing in your income statement as a corporation tax reduction or credit.

If you are calculating this before you finalise your accounts, you will need to adjust your corporation tax to include the actual figures – or you can make an estimate.

Alternatively, if you don’t know your R&D figures until after you have finalised your accounts, you can make a prior year adjustment once your claim has been processed.

Accounting for RDEC costs

The RDEC, meanwhile, is an ‘above-the-line’ credit, classed as taxable income for accounting purposes.

Typically, you will show this as ‘other income’ in your income statement. Depending on whether your company is profit or loss-making, the R&D credit can be used to discharge a corporation tax liability or result in a cash payment from HMRC.

As with SME tax relief, you can finalise your R&D claim calculation early to show an accurate figure in your accounts, provide a reliable estimate, or wait and include a prior year adjustment.

Thomson Cooper is on hand to help you through the process of calculating R&D tax credits. Get in touch with us.

Other posts you might like:

Charity Newsletter Autumn 2023

Welcome to the latest edition of our charity newsletter featuring issues that affect the third sector including reform to charity law, annual return changes and an accounting and tax update.

read more

2023 Autumn Statement Guide

Download our free guide to the 2023 Autumn Statement and find out more about the measures that were revealed in this pre-election year announcement.

read more

Autumn Statement Briefing Events 2023

Join us at one of our free Autumn Statement Briefing events in Edinburgh and Dunfermline for a concise summary of the 2023 Autumn Statement. We will provide an overview of other significant changes in the tax regime that will impact both individuals and companies. Networking opportunities and refreshments included.

read more