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.
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.
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.
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:
To reduce your tax charge to reflect your R&D claim:
Then, when you are receiving a refund of tax paid:
On the other hand, if you are awaiting a tax credit:
Then, when the credit is received from the HMRC:
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.
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:
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:
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.
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.