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

Stephen James CTA
Senior Tax Manager
Adam Kotas director
Adam Palmer
Tax Manager

The accounting treatment for research and development (R&D) tax credits in the SME scheme is straightforward: R&D tax credits are non-taxable and therefore only affect your tax charge. For RDEC claims, the credit can be recognised above the line in the accounts, having a positive impact on your profit-before-tax.

The way R&D tax credits are treated in your accounts depends on whether you are using:

  1. The SME R&D tax credit scheme, or
  2. RDEC – the Research and Development Expenditure Credit.

Accounting treatment for SME R&D tax credit scheme

For SMEs claiming R&D tax credits the accounting treatment 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 SME R&D tax credits?

As explained above, your SME 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:

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

Then, when you are receiving , if you receive a refund of tax paid:

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

Alternatively, if you are expecting a tax credit:

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

Then, when you receive the credit from HMRC:

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

Accounting treatment for RDEC

Unlike the SME R&D tax credit scheme, the credit you receive when making a claim via RDEC is taxable income. RDEC 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.

As with the SME credit, 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, the accounting treatment will differ.

What is the double entry accounting for RDEC?

Your RDEC 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.

You will need to decide the most appropriate disclosure for your RDEC 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 RDEC:

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

You post the gross value of the RDEC above-the-line (other income), and the tax payable on this in the tax line of the income statement.

And if you receive a cash RDEC payment:

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

As noted, if you capitalize 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.

Example R&D tax credit calculations

Although your exact return will depend on the qualifying R&D activities and costs that our expert chartered tax advisers identify, you can estimate the value of your R&D tax credit by answering just a few quick questions.

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