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Are R&D Tax Credits taxable?

There's an awful lot of things to consider when filing your SMEs financial accounts.

From a compliance standpoint – you could be in real trouble if your accounting isn’t totally sound. And from an optimisation standpoint - a growing business needs to be smart with how they manage their ingoings and outgoings.

The way that research and development (R&D) tax relief is treated in your accounts is dependent on the tax credit scheme you’ve been using.

R&D tax credits are accessible every year, which means this is a topic that innovative companies must have a clear picture of.

Here we’ll be explaining the accounting treatment for both branches of the R&D tax credit scheme – SME and RDEC.

💡 Firsty, what's the difference between SME and RDEC R&D Tax Credits?

Over 20 years ago the UK Government introduced R&D Tax Credits to incentivise innovation and allow businesses to claim back up to 27% of their R&D spending, after their first financial year.

R&D tax credits are divided into two branches; the SME Tax Credit scheme and the RDEC Tax Credit scheme. The only thing that differs between these schemes is that they are designed with different sized companies in mind, and offer slightly different rates of tax relief.

The SME scheme is more common and caters for businesses with:

✅ Less than 500 employees;

✅ Less than €86M in gross assets;

✅ Less than €100M in turnover.

Alternatively, the RDEC scheme caters for businesses that exceed the above metrics.

Within the SME scheme, the financial position of your business also plays a part in determining the size of your R&D claim. But because that’s not relevant to your taxes, we won’t get into the details right now.

Our partners, Claim Capital, are experienced R&D Tax Credit specialists, so if you want to get the full scoop on how R&D Tax Credits work, and how they can benefit innovative businesses – click here to check them out.

💡 Accounting treatment for the SME R&D Tax Credit scheme.

The accounting treatment of R&D Tax Credits filed under the SME Scheme is very simple - your claim is not taxable income.

Instead, it’s a below-the-line benefit that will be reflected in your profit-and-loss account (otherwise known as your income statement), either as a Corporation Tax reduction or as a credit.

If your R&D Tax Credit claim is calculated before your accounts are finalised, you’ll adjust your Corporation Tax to include the actual figures for your R&D tax relief benefit. Otherwise, you can include an estimate.

Finally, if you don’t know the value of your R&D claim until after your accounts have been finalised you can submit a prior year adjustment once your R&D claim has been processed.

💡 Accounting treatment for the RDEC R&D Tax Credit scheme.

On the other hand, the tax benefit you receive when making an RDEC R&D Tax Credit claim is taxable income.

The RDEC scheme was introduced as an above-the-line credit, meaning that you can show the credit as income when calculating accounting profit-before-tax.

For accounting purposes, your gross credit can be recognised above-the-line in your income statement. Typically, showing it as ‘other income’.

However, it is important to bear in mind that this accounting treatment is not compulsory, you should consider discussing the most appropriate treatment with your accountant (hopefully us!), auditor and/or R&D tax credit specialist.

Regardless of whether your claims are made via SME or RDEC, you should look to finalise your R&D claim calculations early enough to be able to show an accurate figure in your accounts, or at least include a reliable estimate. Instead, you can opt to wait and include a prior year adjustment.

💡 Accounting for startups & small businesses.

Fortunately, if this article went straight over your head – it doesn’t matter too much.

We're here to take care of the numbers, so you don't have to.

To progress your company to the top of its’ game, it’s vital that your accountant is well-versed in high-growth business protocol. And at Jump Accounting, we specialise in working with fast-growing startups and SMEs.

Our experts at Jump have years of experience in integrating traditional accounting services with the fundamental task of scaling your company.

If you’re struggling to manage your company’s finances alone, or are tired of chasing a disengaged accountant, get in touch with our experts today.


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