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Are R&D Tax Credits taxable?

Updated: May 18, 2023

When filing your SME's 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 Tax Relief (R&D Tax Relief) is treated in your accounts is dependent on the R&D Tax Credits scheme you file under.

As R and D Tax Credits are accessible every financial year - provided that the research and development work continues - this is a topic that innovative businesses must have a clear understanding 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 and D Tax Credits?

R and D Tax Credits were introduced by the UK government over 20 years ago. They were implemented to incentivise innovation such as advances in science and technology by allowing businesses to claim back up to 33% of their R&D spending, after their first fiscal year. As of April 2023 in line with the Spring Budget announcement, the highest amount businesses can claim back is 27%.

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 R&D Tax Relief.

The (more common) SME R and D Tax Credits scheme caters for businesses with:

✅ Less than 500 employees;

✅ Less than €86M in gross assets;

✅ Less than €100M in turnover.

Alternatively, the RDEC R and D Tax Credits scheme caters for businesses that exceed the above metrics.

Within the SME scheme, your business' 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.

To learn more about how a business' financial position affects the size of their R and D Tax Credits, read our related blog: How are R&D Tax Credits calculated?

💡 Accounting treatment for SME R&D Tax Credits.

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 repayable cash 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 RDEC R&D Tax Credits.

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

The RDEC scheme was introduced as an 'above-the-line' credit, which means that you can show 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. 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 Advisor.

Regardless of whether your R and D Tax Credits are filed under 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.

The team here at Claim Capital is well-equipped to clarify your R&D claim for the purpose of your financial accounts, because we work closely beside our sister company, Jump Accounting. Our combined expertise in R and D Tax Credits and proactive accounting allow us to advise our clients on the proper accounting treatment for their R&D claims.

Moreover, clients of both Claim Capital and Jump Accounting can benefit from the seamless integration of their R&D claim benefit into their financial accounts every year - never having to worry about if their accountant is experienced in research and development tax.

Plus, Jump Accounting clients have their year-end accounts prioritised to get their R&D claim completed and submitted by the Claim Capital team at their earliest possible convenience. If you'd like to explore how switching to Jump Accounting can optimise your bookkeeping as well as your annual R&D claim process, make an enquiry on their website.

💡 Enrich your cashflow through R&D Tax Credits, year after year.

When mapping out your business strategy for the year, 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 initiatives, 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, overcharging for their service, or both!

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


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