How to Account for R&D Tax Credit Claims

How to Account for R&D Tax Credit Claims

Overview

Accounting for an R&D Tax Credit Claim is generally a straightforward process, however, the details on how this is done depends upon the specific R&D Regime/s that you are claim under.
This article covers the how to account for costs that have been expensed to the P&L, rather than those that have been capitalised to the balance sheet.

Accounting for SME Regime Costs

The SME Regime is a super deduction that does not affect your taxable income. Hence, it will appear in your P&L account as a CT (Corporation Tax) reduction or credit.
Since there is a three-year time limit for submission of an R&D Tax Credit claim, but only a one-year time limit for submitting the company accounts, it can be the case that either is finalised before the other. Should your claim for R&D Tax Credits be finalised before the accounts, you will include the full figures within the CT return. If the R&D claim is not yet complete when the accounts are submitted then you can include a prior year adjustment after the claim is finalised.

Double-entry Bookkeeping for SME Regime Expenditure

Since the SME R&D Relief reduces your tax liability (below the line relief), it should be reflected in the tax line of your P&L.
To account for the SME relief:
  • (Dr) Total CT, to the balance sheet
  • (Cr) Additional CT, to the P&L
When the SME Relief is received from HMRC:
  • (Dr) Bank, to the balance sheet
  • (Cr) Total CT, to the balance sheet

Accounting for RDEC Costs

RDEC is a taxable credit, applying above the line. This has the advantage of showing as an income when calculating the company's profit before tax.
The gross credit should normally be recognised in your P&D account (but in most cases, it is worth also discussing the precise treatment with your accountant and/or auditor). As with the SME regime, there is a three-year time limit for submission of the claim, so it can also be that the R&D Tax Credits claim is finalised before the accounts, or vice-versa. This will determine whether you include the full figures within your CT return or whether you include a prior year adjustment in later accounts after the R&D claim has been finalised.

Double-entry Bookkeeping for RDEC Expenditure

Since RDEC applies above the line, in appose to the SME regime (that applies below the line), the Double-entry Bookkeeping is different.
An example is provided below, but you should speak with your accountant for the most appropriate treatment owing to your company's specific circumstances.
  • (Dr) Total CT, to the balance sheet
  • (Dr) Additional CT payable, to the P&L
  • (Cr) Other income, to the P&L
Once the RDEC payment has been recieved it can then be posted as:
  • (Dr) Bank, to the balance sheet
  • (Cr) Total CT, to the P&L

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