What is the accounting treatment for R&D tax credits?

The accounting treatment for research and development (R&D) tax credits depends on which scheme your company is claiming under. Historically, companies would have claimed under either the RDEC scheme or the SME scheme. However, for accounting periods beginning on or after 1 April 2024, the government has introduced the merged scheme which applies to all companies, except those that qualify for enhanced R&D intensive support (ERIS). For more on the merged scheme and ERIS, see:

Accounting treatment for R&D merged scheme

Accounting treatment for ERIS

For merged scheme claims, the credit can be recognised above the line in the accounts, having a positive impact on your profit-before-tax. The RDEC scheme operates in the same way. ERIS is more straightforward in the sense that R&D tax credits under this incentive are non-taxable and therefore only affect your tax charge, much in the same way as the existing SME scheme operates.

Further information on both the merged scheme and ERIS can be found in our following KnowledgeBank articles:

• Merged scheme: all you need to know

• ERIS: essential read

Accounting treatment for R&D merged scheme (same as existing RDEC scheme)

The credit you receive when making a claim via the merged scheme is taxable income. This operates in the same way as RDEC, which was originally promoted as an above-the-line credit, referring to the fact that you can show the credit as income when calculating accounting profit-before-tax.

For accounting purposes, your gross credit can be recognised above-the-line in your income statement. Typically, it shows as ‘other income’. It is important to note that this accounting treatment is not compulsory, so it is worth discussing the most appropriate treatment with your accountant, auditor and/or R&D tax credit adviser.

You can finalise your R&D claim calculation early enough to show an accurate figure in your accounts, or include a reliable estimate, or wait and include a prior year adjustment.

If your R&D expenditure is deferred to the balance sheet (through capitalising your R&D expenditure), the accounting treatment will differ.

What is the double entry accounting for the merged scheme?

Your credit is taxable income and is shown above-the-line in your accounts. The double entry accounting for this is therefore different to an SME R&D tax credit claim, which many companies now claiming under the merged scheme might be more accustomed to.

You will need to decide the most appropriate disclosure for your credit in your income statement. You could show it as other income, or net it off of R&D expenditure (if shown).

For example, to post the credit:

Dr Corporation Tax (balance sheet)
Dr Corporation tax charge (income statement)
Cr Other income (income statement)

You post the gross value of the credit above-the-line (other income), and the tax payable on this in the tax line of the income statement. The remainder is then posted to Corporation Tax debtor/creditor on the balance sheet.

And if you receive a cash credit payment:

Dr Bank (balance sheet)
Cr Corporation Tax (balance sheet)

As noted, if you capitalise your R&D costs, the accounting will differ from the above.

Please note that these are simplified examples to guide you. It is always best to consult with your accountant and/or R&D tax credit adviser for advice specific to your claim.

---

Accounting treatment for ERIS (same as existing SME R&D tax credit scheme)

For loss-making SMEs claiming ERIS, the accounting treatment for the credit received is straightforward: your R&D tax credit is not taxable income. It is a below-the-line benefit and will be shown in your income statement (also known as your profit-and-loss account) either as a Corporation Tax reduction or a credit.

If you calculate your R&D tax credit before finalising your accounts, you will adjust your Corporation Tax to include the actual figures for your R&D tax credit benefit. Otherwise, you can include an estimate. Finally, if you don’t know what your R&D tax credit is worth until after you have finalised your accounts, you can include a prior year adjustment once your claim has been processed.

This is because you file your R&D tax credit claim retrospectively after your accounts are finalised, and the deadline for filing your Corporation Tax return is usually later than that for filing your statutory accounts.

What is the double entry accounting for ERIS R&D tax credits?

As explained above, your ERIS R&D tax credit claim is a below-the-line benefit. If your claim reduces your tax liability, you will reflect this in the tax line of your income statement and in your Corporation Tax creditor.

To post your pre-R&D claim tax charge to the accounts:

Dr Corporation tax charge (income statement)
Cr Corporation Tax (balance sheet)

To reduce your tax charge to reflect your R&D claim, whether this is a reduction in CT payable or a tax credit (or both):

Dr Corporation Tax (balance sheet)
Cr Corporation tax charge (income statement)

On the assumption you are receiving a refund or payable tax credit from HMRC when your claim is processed you receive a payment from HMRC:

Dr Bank (balance sheet)
Cr Corporation Tax (balance sheet)

If you are an accountant looking to partner with ForrestBrown, find out about our R&D tax credit partner programme.