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R&D Tax Credits and company accounts

All that you need to know

How should R&D Tax Credits be treated within company accounts?

Research and Development (R&D) Tax Credits within the SME scheme is accounted for in a straightforward manner. As R&D Tax Credits are non-taxable, they will only change the position of a company’s tax liability. Any Claims under the RDEC scheme will be recognised as above the line credits within the accounts and this has a positive effect on the company’s pre-tax profit.

Firstly, it establishes if your company has claimed using SME or RDEC scheme, this will determine the treatment for the submission.

 

What is the difference between the R&D Tax Credit SME and RDEC Schemes?

To apply under the SME scheme the company must:

· Have 500 employees or less · Have a turnover which is less than €100 million · Or a balance sheet less than €86 million

To apply under the SME scheme the company must:

· Have more than 500 employees · Have a turnover that exceeds €100 million · Or a balance sheet over €86 million

How should R&D Tax Credits under the SME scheme be treated in accounting?

If your company who qualify under the SME scheme, the way the tax relief is managed within the accounts is straightforward, just as the tax credit is not classed as taxable income.

It is commonly referred to as ‘’below the line’’ benefit and are shown in the company’s profit and loss statement, it can be either as a reduction within its Corporation Tax Liability or as a credit.

If your company’s accounts are in draft, then you can simply incorporate the necessary figures of R&D tax relief figures within the tax computation submit that as normal.

However If you are retrospectively submitting your R&D Tax credit figures, you simply amend an already submitted return to include the associated costs and this will update the company’s tax position and generate either losses to be carried out forward, a payable credit or a tax repayment.

What is the double entry accounting for SME R&D Tax Credits?

 R&D Tax Credits under the SME scheme count as ‘’below-the-line’’ benefit. If your company’s claim lessens its tax liability, this should be reflected in the profit-and-loss-statement and in its Corporation Tax creditor.

To post your company's tax (pre-R&D):

·        Dr Corporation Tax charge (profit-and-loss statement)

·        Cr Corporation Tax (balance sheet)

To reduce your company’s tax charge to reflect its R&D claim:

·         Dr Corporation Tax (balance sheet)

·         Cr Corporation Tax charge (profit-and-loss statement)

Alternatively, if your tax credit is expected:

·         Dr Corporation Tax (balance sheet)

·         Cr Corporation Tax charge (profit-and-loss-statement)

To reduce your company’s tax charge to reflect its R&D claim:

·         Dr Corporation Tax (balance sheet)

·         Cr Corporation Tax charge (profit-and-loss statement)

Then, when your company receives a Tax refund:

·         Dr Bank (balance sheet)

·         Cr Corporation Tax (balance sheet)

Then, when your credit is received from HMRC:

·         Dr Bank (balance sheet)

·         Dr Corporation Tax (balance sheet)

Accounting for the RDEC scheme

The treatment for RDEC is slightly different, as it is classed as taxable income. RDEC has been originally set up as an above-the-line credit this means your companies should show the credit as income when calculating pre-tax profit.

Regarding of accounting, a company’s gross credit is above-the-line in its profit-and-loss statement, usually it’s shown as ‘’other income’’. As with the SME credit, your company can finalise its R&D calculations and submit with the accounts or the accounts can be retrospectively amended after submission. 

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Double Entry Accounting Under the RDEC scheme

Your company’s RDEC benefit is taxable income and is shown as above-the-line in your accounts. The double entry accounting is different to a R&D Tax Credit claim under the SME scheme. Your company will then need to decide on the most useful disclosure for the RDEC relief in your profit and loss-making statement, as you could also be shown as other income, or taken off the R&D expenditure amount. 

For instance, to post the RDEC:

·         Dr Corporation Tax (balance sheet)

·         Dr Corporation Tax charge (profit-and-loss statement)

·         Cr Other income (profit-and-loss statement)

If a cash payment is received via the RDEC scheme:

  • Dr Bank (balance sheet)
  • Cr Corporation Tax (balance sheet)

 Your company must post the RDEC relief’s gross value above-the-line (other income), and the tax which needs to be paid on this in the tax line of the profit-and-loss-statement.

As noted, if a company capitalises its R&D costs, the accounting will be different from that shown above.

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