Are R&D Tax Credits taxable?

Updated: May 9

When filing your SMEs financial accounts, there’s an awful lot to consider.


From a compliance standpoint – you could land in hot water if your accounting isn’t totally sound. And from an optimisation standpoint - growing businesses need to be smart with their cashflow.


The way that research and development (R&D) tax relief is treated in your accounts is dependent on the tax credit scheme you’ve been using.


As R&D tax credits are accessible every year, this is a topic that innovative companies must have a clear picture of.


In this article, we’ll be explaining the accounting treatment for both branches of the r and d tax credits scheme – SME and RDEC.



💡 First things first, what's the difference between SME and RDEC R&D Tax Credits?


R&D Tax Credits were introduced by the UK government over 20 years ago. They were implemented to incentivise innovation and allow businesses to claim back up to 33% of their R&D spending, after their first financial year.


R and D tax credits are split into two branches; the SME Tax Credit scheme and the RDEC Tax Credit scheme. All that differentiates these schemes is that they’re designed with different sized companies in mind, and offer slightly different rates of tax relief.


The (more common) SME scheme caters for businesses with:


✅ Less than 500 employees;

✅ Less than €86M in gross assets;

✅ Less than €100M in turnover.


Alternatively, the RDEC scheme caters for businesses that exceed the above metrics.


Within the SME scheme, your businesses financial position also plays a part in determining the size of your R&D Tax Credit claim. But that’s not relevant to your taxes, so we won’t get into the details here.


Check out our previous blog to learn more about how a businesses financial position affects R&D Tax Credits.



💡 Accounting treatment for the SME R&D Tax Credit scheme.


Within accounting, R and D Tax Credits filed under the SME scheme are treated very simply – your claim is not taxable income.


Instead, it’s a below-the-line benefit and will be reflected in your profit-and-loss account (otherwise known as your income statement), either as a Corporation Tax reduction or as a credit.


If you calculate your R&D Tax Credit claim before your accounts are finalised, you’ll adjust your Corporation Tax to include the actual figures for your R&D tax relief benefit. Otherwise, you can include an estimate.


Finally, if you don’t know the value of your R & D claim until after your accounts have been finalised you can submit a prior year adjustment once your R & D claim has been processed.



💡 Accounting treatment for the RDEC R&D Tax Credit scheme.


On the contrary, the tax benefit you receive when making an RDEC R&D Tax Credit claim is taxable income.


The RDEC scheme was introduced as an above-the-line credit, which means that you can show the credit as income when calculating accounting profit-before-tax.


For accounting purposes, your gross credit can be recognised above-the-line in your income statement. Typically, it shows as ‘other income’.


It’s important to keep in mind that this accounting treatment is not compulsory, so it is worth discussing the most appropriate treatment with your accountant, auditor and/or R&D tax credit advisor.


Regardless of whether your claims are made via SME or RDEC, you should endeavour to finalise your R&D claim calculations early enough to be able to show an accurate figure in your accounts, or include a reliable estimate. Or instead, you can opt to wait and include a prior year adjustment.



💡 Enrich your 2022 cashflow through R&D Tax Credits.

When mapping out your business strategy for 2022, did you factor in the huge support available from R&D Tax Credits?


The UK’s thriving research & development scene is a testament to the SME and RDEC R&D Tax Credit schemes, and how the funding they provide helps to supercharge businesses.


If you’re innovating a new product or service, and could do with a cash injection, arrange a free consultation with our R&D Tax Specialists today.


And remember - if you’re already claiming R&D tax relief, now would be a great time to check whether your existing advisor is undervaluing your claim.


Our team would be more than happy to investigate this for you.