If you’re carrying out research and development (R&D) activities in your company, it’s important to learn how to account for your R&D tax credits properly.

You’ll need to account for the benefit differently depending on which scheme you claim under.

 

How to account for R&D tax credits

R&D tax relief allows companies to reduce their liabilities by claiming qualifying expenditure on their corporation tax bill.

Your R&D costs are classed as internal intangible assets, so you need to stick to strict accounting standards when accounting for them. Furthermore, you’ll need to treat R&D tax credits differently depending on which scheme you use.

There are two R&D schemes available in the UK:

• the SME R&D tax credit scheme
• the research and development expenditure credit (RDEC)

The SME R&D scheme is usually for smaller businesses, while larger enterprises need to use the RDEC scheme.

 

How to treat SME R&D tax credits

If you use the SME scheme, you’ll treat your R&D tax credits as a non-taxable (or “below-the-line”) benefit. That means it will show up as either a corporation tax reduction or credit in your income statement.

Businesses that calculate their R&D credit before finalising their accounts can include the figures in their corporation tax return — or you can include an estimate instead.

Sometimes, you may not know how much you can claim until after your accounts are finalised. If this happens, you’ll be able to amend your corporation tax return once you find out how much your R&D tax credit is worth.

Double entry bookkeeping for SME R&D

Since tax credits under the SME R&D scheme are non-taxable benefits, you’ll need to account for them in a particular way.

If your R&D claim reduces your company’s tax liability, you’ll need to account for the tax credits as follows:

• debtor — corporation tax charge (profit-and-loss statement)
• creditor — corporation tax (balance sheet.

You’ll also need to record your SME R&D relief when you receive it from HMRC like so:

• debtor — bank (balance sheet)
• creditor — corporation tax (balance sheet).

How to treat RDEC tax credits

Meanwhile, the RDEC is an “above-the-line” benefit, which means any tax credits you claim will count as taxable income. You can include this in your company accounts by either:

• regarding your claim as other income;
• or deducting the sum from your R&D expenditure.

We’d recommend speaking to an accountant to help you understand these options fully.

You’ll be able to either include your RDEC calculations when submitting your tax return or wait to make an adjustment later on – just like with the SME scheme.

Double entry bookkeeping for RDEC

You can see your company’s RDEC receipt above the line in your accounts. This means you need to approach your double-entry bookkeeping method a little differently than those who use the SME scheme.

As mentioned, you’ll need to either disclose your RDEC tax credits as other income or as R&D expenditure. The steps to post the RDEC may be as follows:

• debtor — corporation tax (balance sheet)
• debtor — corporation tax charge (profit-and-loss statement)
• creditor — other income (profit-and-loss statement).

You should record the gross value of the RDEC in your other income and the tax payable on it in the tax line of the profit-and-loss statement.

Meanwhile, if you receive a cash RDEC payment, you’ll need to debit and credit your account like this:

• debtor — bank (balance sheet)
• creditor — corporation tax (balance sheet).

It’s important to note that your accounting will differ if you capitalise on your R&D costs.

 

Getting it right

Getting your R&D tax credits right can be complicated and time-consuming, so you may want to access professional bookkeeping services.

No two R&D claims are the same, so it’s best to talk to an expert for specific advice on your tax credits. We’re corporation tax experts at Thomas Barrie, so you can rely on us to help you make the most of your R&D activities.

Get in touch to find out more about how to account for R&D tax credits.