Research and Development Tax Relief
The way that Research and Development Tax Relief – otherwise known as R&D Tax Credits - are treated in your accounts depends on whether you are filing under the SME or the RDEC R&D Tax Relief scheme.
These two schemes are differentiated by the amount of R&D Tax Relief they offer, and the size of businesses they cater to. The RDEC R&D Tax Credit scheme offers financial incentives to innovative businesses with over 500 employees, more than €100M in turnover, and more than €86M in gross assets.
These metrics are reflective of large, well-established corporations – so the RDEC scheme is the less conventional out of the two. The RDEC scheme is also the only R&D Tax Relief scheme that accepts claimants that have previously received grant funding, as unlike its counterpart, the RDEC scheme is not classified as ‘notified state aid’.
To learn more about how businesses can utilise R&D Tax Credits and Grant Funding on the same project, read our related blog: Can R&D Tax Credits and Grant Funding work together?
The RDEC R&D Tax Relief scheme
The RDEC R&D Tax Relief scheme allows claimants to recover a fixed rate of 13% of their yearly R&D expenditure in the form of a Corporation Tax deduction.
There are rare instances where RDEC claimants can receive their R&D claim through a repayable cash credit, but this only occurs if the following conditions are met, and there is a remaining excess:
All Corporation Tax liabilities for the accounting period are fulfilled.
If the RDEC claim benefit remaining after step 1 exceeds the net value of the claim, the balance is withheld and carried forward for you to use in future periods.
HMRC has offset the tax benefit against any outstanding Corporation Tax owed for any other accounting periods, or any outstanding tax amounts such overdue PAYE or VAT liabilities.
Unlike the SME R&D Tax Credit scheme, the financial position of the business at the time of claiming does not affect the rate of R&D Tax Relief. Both profitable and loss-making companies can reclaim 13% of their total R&D costs for the past financial year.
Another differentiation between the RDEC scheme and the SME scheme is that the return of RDEC R&D Tax Credits is subject to Corporation Tax, which reduces the benefit to around 10.5%.
As R&D Tax Credits can be claimed on an annual basis, they need to be accounted for in a business’ bookkeeping records. This is a recurring task that must be understood to get the most out of your R&D Tax Credits and maintain compliance.
In this blog, we’re going to take an in-depth look at how RDEC R&D Tax Credits are treated in terms of your financial accounts.
Unlike the SME R&D Tax Credit scheme, the claim benefit you receive from filing an RDEC claim is classed as taxable income. RDEC was originally described as an above-the-line credit, referring to the fact that you can report the claim benefit as income when calculating accounting profit-before-tax.
For accounting purposes, your gross credit can be recognised above-the-line in your income statement - generally reported as ‘other income’. It’s important to recognise that this accounting treatment is not compulsory, so it’s important to consult your accountant and R&D Tax Advisor to work out the most appropriate treatment.
Alongside Claim Capital, the R&D Tax Credit Specialists, exists our group company – Jump Accounting. Jump Accounting provides proactive accounting and strategic business advisory services to startups and SMEs in the UK. The synergy between our group companies makes the process of discussing the optimal accounting treatment for your R&D claims seamless and efficient.
In an era of increased compliance within tax liabilities, it’s crucial for your R&D Tax Advisor and your accountant to maintain an open dialogue regarding how your R&D Tax Credits should appear in your accounts.
Just like SME R&D Tax Relief, you can finalise your R&D claim calculation early enough to show an accurate figure in your accounts or include a reliable estimate. Alternatively, you can 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 RDEC R&D Tax Credits
As outlined above, your RDEC R&D claim benefit is taxable income and is shown above-the-line in your accounts. The double-entry accounting process for RDEC R&D claims is therefore different to that of an SME R&D Tax Credit claim.
You will need to determine the most appropriate disclosure for your RDEC R&D claim in your income statement, preferably with the help of an accountant with experienced in R&D Tax (such as Jump Accounting!). You can decide whether to show it as other income, or net it off of R&D expenditure, if shown.
For example, to post the RDEC claim:
Debtor - Corporation Tax (balance sheet)
Debtor - Corporation tax charge (income statement)
Creditor - Other income (income statement)
The claimant would 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 your RDEC claim as a repayable cash credit:
Debtor - Bank (balance sheet)
Creditor - Corporation Tax (balance sheet)
As mentioned, if you capitalize your R&D costs, the accounting will differ from the above.
These examples are simplified for the purpose of providing an overview of accounting treatments for RDEC tax claims. Remember – it’s always best to consult with your accountant and your R&D Tax Specialist for bespoke advice regarding your R&D Tax Credit claim accounting.
To explore different topics within the field of R&D Tax Relief in relation to accounting, check out our blogs:
As we mentioned, Claim Capital works in synergy with Jump Accounting - which was built in response to our clients’ frustration with unresponsive, uninvested accountants.
Since our integration, we’ve found the process of completing, submitting, and accounting for R&D Tax Credits become more efficient than ever.
If you’re claiming R&D Tax Relief, or have ambitious plans for growth, your business might demand more than your typical accountant.
By switching to Jump Accounting, your year-end accounts are prioritised by our team and integrated into our system, so that we get your R&D Tax Credit claim underway at our earliest convenience.
Learn more about the benefits of switching to Jump Accounting and enquire on their website to talk through an accounting package that works for your business.