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How are R&D tax credits treated?

The SME scheme treats the accounting for research and development (R&D) tax credits in a straightforward way. The tax credits received by R&D companies are non-taxable and thus only affect your tax charge. For RDEC claims, the credit can be recognised as above-the-line income in your accounts, thus having a beneficial effect on your profit-before-tax.
The different ways in which R&D tax credits are treated

The treatment of tax credits in your R&D account will depend on whether you are using:

  1. the SME R&D tax credit scheme, or
  2. the Research and Development Expenditure Credit (RDEC).
SME R&D tax credit scheme accounting treatment

If R&D tax credits are being claimed via the SME R&D tax credit scheme, the accounting treatment is straightforward. The tax credits received by your R&D company are considered non-taxable income, and they will either be shown as Corporation Tax reductions or as a credit in your income statement (also known as your “profit-and-loss account”).

In order to adjust your Corporation Tax to include the actual figures for your R&D tax credit benefit, you will have to calculate your R&D tax credit before finalising your accounts. Alternatively, you can include an estimate.

If you are uncertain as to what the value of your R&D tax credits are, you can include an adjustment dating from the previous year once your claim has been processed.

The reason for this is that you have to file your R&D tax credit claims after your accounts have been finalised, and the deadline for filing your Corporation Tax return is usually later than the deadline for filing your statutory accounts.

RDEC tax credit accounting treatment

Tax credits issued by the RDEC are considered taxable income. This is different from the scheme employed by the SME. RDEC was originally promoted as an above-the-line credit, meaning that you can present the credit as income when calculating profit-before-tax in your accounting.

For accounting purposes, your gross credit can be classified as above-the-line income in your income statement. It will usually show up as ‘other income’.

It is important to remember that it is not compulsory to do the calculations for your accounting in this way. It is best to discuss the most suitable treatment with your accountant, auditor and/or R&D tax credit adviser.

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. Alternatively, you can wait and include a prior year adjustment instead.

Join us on LinkedIn Live!

If you liked this, then you’ll love our upcoming LinkedIn Live event!

On the 23rd of April, 2021 at 11 am, our very own CEO Wesley Rashid and R&D Manager Anh Vu will be joined by Edo Salvesen, CFA and Director of Finstock Capital, to discuss everything you need to know about claiming R&D Tax Credits in - “Unlocking your R&D Potential”.

Attendees will be invited to join Anh for a complimentary 1-on-1 R&D clinic, don't miss it!

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