Research and Development Tax Relief (R&D Tax Relief)
The way that Research and Development Tax Credits (R&D Tax Credits) are treated in your accounts depends on whether you are filing under the SME or the RDEC 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 SME R&D Tax Credit scheme offers financial incentives to innovative businesses with less than 500 employees, less than €100M in turnover, and less than €86M in gross assets.
These metrics are reflective of large, well-established corporations – so the SME scheme is the more conventional out of the two.
The SME R&D Tax Relief scheme
The SME R&D Tax Relief scheme allows profit-making businesses to reclaim up to 21.5% of their yearly R&D expenditure in the form of a Corporation Tax deduction.* Alternatively, loss-making businesses can reclaim up to 18.6% of their yearly R&D expenditure as a repayable cash credit, free to spend on their R&D project or any other cashflow issues that might be more pressing.
As R&D Tax Credits can be claimed on an annual basis, they need to be accounted for in a business’ bookkeeping records. In this blog, we’re going to take an in-depth look at how SME R&D Tax Credits are treated in terms of your financial accounts.
The accounting treatment for R&D Tax Credits within the SME scheme is generally straightforward, more so than that of the RDEC scheme.
For companies filing R&D Tax Credits under the SME R&D Tax Relief scheme, your R&D Tax Credit benefit is not classed as taxable income. Instead, it’s a below-the-line benefit and will be reflected in your income statement (also known as your profit-and-loss account) either as a Corporation Tax deduction or a credit.
If you calculate your R&D Tax Credit claim before finalising your accounts, you will adjust your Corporation Tax to include the figures for your R&D Tax Credit benefit. If you haven’t been able to do this, you can include an estimate.
Lastly, if you don’t know what your R&D Tax Credit is worth until after you have finalised your accounts, you can include a prior year adjustment once your claim has been processed by HMRC.
This situation is actually the more common out of the two. This is because you file your R&D Tax Credit claim retrospectively, covering the previous financial year’s spending, and the deadline for filing your Corporation Tax return is usually later than that for filing your general accounts.
Double-entry accounting for SME R&D Tax Credits
What is double-entry bookkeeping? This is an accounting method where each transaction is recorded in 2 or more accounts using debits and credits. A debit is made in at least one account and a credit is made in at least one other account.
As mentioned, an SME R&D Tax Credit claim is a below-the-line benefit. So if an R&D 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 double-entry accounting steps most likely taken by an SME R&D Tax Credit claimant 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 corporation tax liability to reflect your R&D claim:
Debtor – Corporation Tax (balance sheet)
Creditor – Corporation tax charge (profit-and-loss statement)
When receiving a refund of tax already paid:
Debtor – Bank (balance sheet)
Creditor – Corporation Tax (balance sheet)
Or 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)
To explore different topics within the field of R&D Tax Relief in relation to accounting, check out our blog: Are R&D Tax Credits Taxable?
Next, we’ll be covering the more complicated topic of Accounting Treatment for RDEC R&D Tax Credit claims. Keep up to date with our blog to learn more!
At Claim Capital, we work closely beside our group company – Jump Accounting. Jump Accounting was built in response to our clients’ frustration with unresponsive, uninvested accountants.
This struggle also posed a problem for us as R&D Tax Credit Specialists, as accountants that were slow in providing us with financial information, or that sent over incomplete financial data, limited our ability to complete and submit R&D claims in a quick and efficient manner.
Jump Accounting has streamlined bookkeeping for many of our clients. They offer proactive, streamlined accounting whilst offering additional advisory services to accelerate the growth of early-stage businesses.
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.
*These are the updated figures in line with the new legislation released in the April 2023 Spring Budget.