Accounting for R&D tax credit and relief

R&D (Research & Development) Tax Explained

R&D tax credits are an incentive from the UK government to encourage innovation and growth in businesses. The scheme allows you to claim a tax credit or deduction on your research and development spend which can reduce your corporation tax bill or even get you a cash refund. To qualify for R&D tax credits your project must seek to achieve an advancement in science or technology, address an area of scientific or technological uncertainty and be innovative.

The R&D tax credit scheme is split into two brackets: SMEs and large companies. SMEs can claim an enhanced corporation tax deduction of up to 26% of their qualifying R&D spend, large companies can claim a Research and Development Expenditure Credit (RDEC) of 13% of their qualifying R&D spend. The accounting treatment for R&D tax credits depends on the incentive claimed, RDEC for larger companies or the SME scheme for smaller businesses.

Eligibility and qualifying expenditure

To qualify as R&D the work you do must aim to advance overall knowledge or capability in a field of scientific or technological uncertainty. Advances must be related to more than a company’s own capabilities or knowledge.

Generally developing a new piece of software will qualify if it involves writing new code but not (say) producing a new website using existing technology. Traditional R&D involving the development of new physical products, such as an innovative piece of equipment or a new recipe for food or drink will also qualify.

Even if your project fails you can still get some of the costs back.

Benefits of research and development tax credits

Any reduction in the tax burden for companies is welcome, and the relief is designed as an incentive to innovators, allowing them to invest more resources in their business with all of the economic benefits it brings.

Tax refunds can be invaluable for startups. Reducing your corporation tax bill can open up more opportunities as you’ll have some capital leftover.

How to claim r&d tax credit or relief

You can claim the relief when you file your company’s taxes, once you finish preparing your accounts. This is usually handled by the company’s accountants and tax advisers, who will help the owner to establish what activity and costs will qualify before making a claim in your corporation tax return.

There is a time limit of two years after the end of an accounting year for making a claim, so if you haven’t done one and think you may qualify, there is time to make a retrospective claim.

Accounting Treatment for R&D Tax Credits

The accounting treatment for R&D tax credits varies depending on the type of credit claimed. For SME R&D tax credits the credit is treated as a “below the line” benefit which means it directly reduces the company’s corporation tax liability. This reduction is shown in the cr corporation tax charge. For the Research and Development Expenditure Credit (RDEC) the credit is treated as taxable income so it increases the company’s income statement. Proper accounting entries such as dr corporation tax are required to record these transactions and show the tax liabilities in the financial statements. Understanding the correct accounting treatment for R&D tax credits is key to ensure accurate and compliant reporting as it affects both the profit and loss account and the overall tax liability of the company.

R&D Tax Credit Calculations

Calculating R&D tax credits is complicated but it’s all about identifying the qualifying R&D expenditure and applying the relevant tax credit rate. For SME R&D tax credits the credit is 26% of qualifying R&D expenditure. For RDEC the credit is 13% of qualifying R&D expenditure. Given the complexity of these calculations it’s best to seek professional advice to ensure accuracy and maximise the tax credit claim. Proper calculation not only ensures compliance but also gets you the most benefit from the R&D tax credit scheme.

How to Maximise R&D Tax Credit Claims

To maximise R&D tax credit claims businesses should ensure they identify and record all qualifying R&D expenditure. This includes staffing costs, consumable items, payments to sub-contractors and prototype costs. Companies should also keep detailed records of their R&D projects including project plans, technical reports and financial records.

It’s also important to seek advice from a specialist R&D tax credit advisor to ensure the claim is prepared correctly and in compliance with HMRC’s latest disclosure requirements. A specialist advisor can help you navigate the R&D tax credit scheme and get you the maximum tax credits you are entitled to.

Also consider the timing of your R&D tax credit claim. The claim can be made before filing accounts and an estimate can be used if the actual claim is not known. A prior year adjustment can be included after HMRC process the claim. By understanding the accounting treatment for R&D tax credits and seeking advice businesses can maximise their R&D tax credit claims and get the financial reward for their innovation.

Further information