What is the accounting treatment for R&D tax credits: RDEC & SMEs?

What is the Accounting Treatment for R&D Tax Credits: RDEC, SMEs and ERIS?

The accounting treatment for R&D tax credits depends on the scheme your company falls under. Historically, the UK offered two main R&D tax relief incentives to encourage innovation:

• SME R&D Tax Credits
• Research and Development Expenditure Credit (RDEC)

As of 1 April 2024, the landscape has evolved:

• A merged RDEC scheme now applies to both SMEs and large companies.
• A special ERIS scheme supports high-intensity R&D, loss-making SMEs.

A brief history of R&D tax credit accounting treatment

The accounting treatment for R&D tax relief has evolved alongside changes to the schemes themselves.

• Early 2000s: When R&D tax relief was introduced in 2000 (for SMEs) and 2002 (for large companies), there was little guidance on how to reflect these credits in financial statements. Many companies treated them simply as tax adjustments.
• 2013: The introduction of RDEC brought a major shift. Because RDEC is taxable and shown above the line as 'Other Income', companies were encouraged to present it in the P&L as a means of reflecting R&D activities more visibly. This became the standard for large companies.
• Pre-2024: SMEs continued to treat credits as a reduction in the tax charge – a below-the-line benefit – whereas RDEC claims (used by larger businesses or SMEs claiming under certain conditions) were treated as taxable income.
• Post-April 2024: With the RDEC scheme now merged with the SME scheme and applying to most claimants, accounting treatments are converging around the RDEC model – with a greater emphasis on recognising the credit as income in the P&L for transparency and comparability. The ERIS scheme, however, retains below-the-line treatment consistent with traditional SME relief.

Accounting for SME R&D Tax Relief

The SME scheme provides non-taxable credits, which means they only impact your tax charge (i.e., it’s a below-the-line benefit).

If claiming for a historical period, any credit should appear in your income statement as either a reduction in Corporation Tax or as a credit. If your claim is calculated before filing accounts, reflect it in your financials directly. If not, you can estimate the amount or use a prior-year adjustment once HMRC processes your claim.

Double-Entry Example for SME Relief:

When the credit is calculated:

• Dr – Corporation Tax (Balance Sheet)
• Cr – Corporation Tax (P&L)

When the credit is received:

• Dr – Bank (Balance Sheet)
• Cr – Corporation Tax (Balance Sheet)

Accounting for RDEC and the Merged RDEC Scheme

The RDEC scheme, initially designed for large companies, is now the default for all sizes of businesses. RDEC credits are taxable, and therefore shown as income in the P&L – often referred to as an “above-the-line” credit.

Currently, RDEC provides 20% of qualifying R&D expenditure, subject to Corporation Tax (19%–25%).

Double-Entry Example for RDEC Relief:

When the credit is calculated:

• Dr – Corporation Tax (Balance Sheet)
• Dr – Corporation Tax Expense (P&L)
• Cr – Other Income (P&L)

When the credit is received:

• Dr – Bank (Balance Sheet)
• Cr – Corporation Tax (P&L)

Note: These are simplified examples. The actual treatment may vary based on factors such as the claim amount, timing, and whether a refund or reduction is applied.

Accounting for ERIS (Enhanced R&D Intensive Support)

The ERIS scheme, like the SME scheme, is for loss-making SMEs and provides non-taxable credits. These impact only your tax charge and appear as below-the-line credits in your income statement.

As these companies are not paying tax, the benefit will not appear as a tax charge. Adjust your accounts if the claim is ready before filing; otherwise, use an estimate or a prior-year adjustment post-HMRC processing.

Why Choose Us?

At Kene, we specialise in navigating the complexities of R&D tax credit accounting. Our team includes chartered tax advisers and sector experts, ensuring your reporting is accurate and fully compliant.

We stay current with HMRC updates and best practices, tailoring our advice to suit your unique business needs. With a strong track record of successful claims, we help you:

• Maximise benefits
• Minimise risk
• Confidently manage your R&D claims

Choose Kene for peace of mind and expert guidance on R&D tax credits.

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