R&D is a great way for your company to innovate its processes to do business better. Plus, you can claim tax relief on your R&D expenditure to save money on your corporation tax bill.
However, accounting for R&D tax relief can be difficult. Typically, your accountant would deal with it all, but it would be useful if we went over how it works so you can understand the mechanics of it.
How to account for R&D tax credits
R&D expenditure is classed as something called internal intangible assets, so you need to maintain strict accounting standards with them.
The way you treat R&D tax credits depends on which scheme you use out of the SME R&D tax credit scheme or R&D expenditure credit (RDEC). The former is used for small companies and the latter for larger ones.
Accounting for SME R&D tax credits
If you use the SME scheme, you will have to treat your tax credit as non-taxable, which means it will show up as a corporation tax reduction or credit in your income statement.
You should adjust your accounts later to reflect the R&D claim if you calculate your claim before filing your accounts; alternatively, you can use an estimate instead.
If you’re unsure about what your tax credit is worth until your accounts are finalised, you can include a prior-year adjustment once HMRC processes your claim.
Double-entry bookkeeping for SME R&D relief
As SME relief reduces your tax liability, you should include it in the tax line of your profit-and-loss statement.
If your R&D claim reduces your company’s tax liability, you’ll need to account for the credit as follows:
- debtor — corporation tax charge (profit-and-loss statement)
- creditor — corporation tax (balance sheet).
You will also need to record your relief when you receive it from HMRC like so:
- debtor — bank (balance sheet)
- creditor — corporation tax (balance sheet).
Accounting for RDEC tax credits
Unlike SME tax credits, the RDEC is regarded as taxable income that you can include in your company accounts by either:
- regarding your claim as other income;
- or deducting the sum from your R&D expenditure.
Which option will suit you depends on your precise situation; speak to your accountant to help you understand each option fully.
You’ll be able to either include your RDEC calculations when submitting your tax return or wait to make an adjustment later on – just like with the SME scheme.
Double-entry bookkeeping for RDEC
Double-entry bookkeeping for the RDEC works differently to the SME scheme because you need to disclose your tax credits as income or R&D expenditure. That means you have to report your credits as follows:
- debtor — corporation tax (balance sheet)
- debtor — corporation tax charge (profit-and-loss statement)
- creditor — other income (profit-and-loss statement).
You should then record the gross value of your tax credits as ‘other income’ and the tax payable on it in the tax line of the profit-and-loss statement.
However, if you receive a cash RDEC payment you’ll need to debit and credit your account like this:
- debtor — bank (balance sheet)
- creditor — corporation tax (balance sheet).
It’s important to note that your accounting will differ if you capitalise on your R&D costs.
Getting it right
Hopefully you can appreciate how complicated and time-consuming accounting for R&D tax credits can be, so we highly recommend you hire an R&D specialist to help you with the process.
At AssureTax, we’re experts who understand the details of accounting for R&D tax credits. Get in touch with us to find out more about how we can help.