How does R&D tax credits affect your company accounts?

How does R&D tax credits affect your company accounts?

The UK Research and Development (R&D) Tax Credits Scheme is a government-backed tax incentive that allows companies to claim back some of the costs they have incurred on research, development and innovation. This is achieved either via a reduction in their Corporation Tax or as a cash lump sum.

The sectors that the scheme covers are wide-ranging, as are the types of expenditure it allows. The aim of the scheme was to recognise innovation by benefiting both individual companies and the wider UK economy.

There are now four funnels for R&D tax credits , depending on how the project is funded and the period the R&D is undertaken in –

• SME Scheme for self funded R&D projects. The SME Scheme operates as an additional deduction to your profit or loss position. 
• Research & Development Expenditure Credit (RDEC) Scheme (for large enterprises and grant-funded or subsidised R&D. The RDEC Scheme is slightly more complex, with the credit being recognised above-the-line in the accounts, producing a positive effect on your profit before tax. 
• ERIS Scheme for research-intensive loss-making SMEs, operating in a similar manner to the SME scheme as an additional deduction and cashed in losses. 
• New RDEC scheme replaces the SME and RDEC schemes after 1 April 2024, and operates similar to the original RDEC scheme.

The effect of the SME R&D tax credits scheme on company accounts

R&D tax credits awarded for this scheme will be shown in your profit and loss account, either as a Corporation Tax reduction or a credit. 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. This timing will affect adjustments to your Corporation Tax.

1. If your accounts have not been finalised when the claim size has been determined and submitted, you will adjust your Corporation Tax or as a cashed in losses payment to include the actual benefit from this claim.
2. If your accounts have already been finalised prior to submitting a claim, you can include a prior year adjustment once your claim has been processed. The benefit will be a repayment of overpaid corporation tax or cashed in losses.

It is recommended that companies include the tax claim in their accounts at the first filing of accounts, to avoid cashflow impacts on the business.  

Refiling accounts with the R&D claim can now be affected by the requirement for a Pre-Notification process for companies making a first R&D claim, which can mean a claim becomes ineligible due to shorter time limits.  

SME R&D tax credits scheme benefit

SME and ERIS R&D tax credit claims are a below-the-line benefit. If your claim reduces your tax liability, you will reflect this in the tax line of your profit-and-loss statement and in your Corporation Tax creditor. A simplified guide explaining the steps most likely taken in relation to your accounts are as follows:

1. Take your resulting profit/loss position before your R&D claim.
   
2. Deduct the 130% or 86% R&D claim enhanced expenditure from your profit/loss. 
3. This will reduce your profit/loss, resulting in a smaller Corporation Tax Bill from HMRC or cashed in losses for a cash repayment from HMRC. 

The effect of the RDEC Scheme on company accounts

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 on with your auditor or accountant.

As with the SME credit, you can finalise your R&D claim calculation early enough to show an accurate figure in your accounts, include a reasonable 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.

RDEC and New RDEC Schemes benefit

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 R&D Tax Credit claim made under the SME criteria. The value of the claim is adjusted according to the 7-step RDEC process.

A simplified guide explaining the steps most likely taken in relation to your accounts are as follows:

1. What is the gross RDEC of the R&D claim (eligible costs)? 
2. Apply the appropriate RDEC rate for the period, which is 13% or 20%. 
3. Adjust the benefit by the Corporation Tax rate, depending on profit or loss position. 

Further adjustments to the benefit of the claim can derive from the level of PAYE/NI paid to HMRC in the period, carry over of RDEC credit from previous years, pay any outstanding debt to HMRC and offset of tax from group arrangements. 

Calculate Your R&D Tax Relief

Our quick, free and easy to use R&D Tax Credit Calculator will give you a ball-park figure on how much R&D Tax Relief you could receive from HMRC. This can be calculated for the current financial year and the 2 previous years. Enter some basic numbers and we’ll estimate what it could be worth. Go to calculator.

If you’re looking for additional help with your R&D Tax Credits claim, please contact us.