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 two funnels for R&D tax credits – the SME Scheme and the Research & Development Expenditure Credit (RDEC) Scheme (for large enterprises and grant-funded work) – and these are treated differently in your accounts. The SME Scheme is more straightforward since the credits are non-taxable, a below-the-line benefit, thus only affecting your tax charge. 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.

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 to include the actual or estimated 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.

It is more likely that the latter case occurs, since R&D tax credit claim tend to be filed 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.

Double entry accounting for the SME R&D tax credits scheme

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 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:

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

  • Debtor – Corporation tax charge (profit-and-loss statement)
  • Creditor – Corporation Tax (balance sheet)

To reduce your tax charge to reflect your R&D claim:

  • Debtor – Corporation Tax (balance sheet)
  • Creditor – Corporation tax charge (profit-and-loss statement)

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

  • Debtor – Bank (balance sheet)
  • Creditor – Corporation Tax (balance sheet)

On the other hand, if you are awaiting a tax credit:

  • Debtor – Corporation Tax (balance sheet)
  • Creditor – Corporation tax charge (profit-and-loss statement)

Then, when the credit is received from the HMRC:

  • Debtor – Bank (balance sheet)
  • Creditor – Corporation Tax (balance sheet)

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.

Double entry accounting for the RDEC Scheme

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.

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

To post the RDEC:

  • Debtor – Corporation Tax (balance sheet)
  • Debtor – Corporation tax charge (profit-and-loss statement)
  • Creditor – Other income (profit-and-loss 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 profit-and-loss statement.

And if you receive a cash RDEC payment:

  • Debtor – Bank (balance sheet)
  • Creditor – Corporation Tax (balance sheet)

If you capitalise your R&D costs, the accounting will differ from the above.

Although we have provided simplified guides to double entry accounting for R&D tax credit benefits, it is always best to consult with your accountant or auditor for advice specific to your claim.

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.

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