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In this short video, we cover how to account for the benefit of UK SME R&D tax credits in your company accounts.
Knowing what accounting entries to include for your R&D tax credits claim
Typically your accountant would deal with this on your behalf but it useful to understand the mechanics so that you can see how the R&D tax relief fits into the overall build up of your financial statements.
We have set out some examples of the accounting entries below but before we dive into them, here’s an overview of the key principles behind accounting for R&D tax credits.
Overview of accounting entries for R&D tax credits
In summary, the SME R&D tax credit is recognised both in your:
- Income Statement (Profit & Loss account) and
- Balance sheet
This is where the accounting “double-entry” fits in i.e. an entry of £x to the income statement and balance sheet.
Given that the benefit of the R&D tax relief either:
- reduces corporation tax otherwise paid/payable OR
- results in a tax credit rebate from HMRC,
this means that it is recognised as income (or a “credit” in accounting-speak!) in your Income Statement.
Note that the R&D relief is posted as a “below the line” adjustment i.e. it falls below your net profit line (note that the Large company (RDEC) treatment is different…) – see the hack below if you use Xero.
It is posted “below the line” because the SME R&D tax is not taxable.
The corresponding accounting entry to the balance sheet is either:
- to the Bank, if it is a retrospective recognition once the cash benefit has been received, or
- it can be posted to the balance sheet as an “asset” (‘Corporation tax recoverable’ or a reduction to the corporation tax creditor).
This entry would be a “debit” in accounting-speak.
So in summary, the double entry would typically be to “credit” the income statement (P&L) and “debit” the balance sheet (corporation tax provision).
Accounting for R&D tax credits in Xero
Be careful if you use Xero as your preferred accounting software.
For some reason, the default chart of accounts recognises corporation tax entries within administrative expenses i.e. “above the line”. This means that your R&D tax credits could erroneously be recognised in admin expenses! If you are not careful, you might accidentally treat the SME R&D tax credit as taxable income in the period if it is classified in this way!
You can change the posting preference within the chart of accounts in settings or just make sure that you adjust this entry before preparing and filing your statutory accounts.
Example 1: How to account for R&D Tax Credits (for prior periods)
The accounting entries for a £50,000 R&D tax credit that had not previously been recognised in the accounts would be as follows:
Example 2: How to account for R&D Tax Credits (in period i.e. in advance of HMRC processing it)
The accounting entries for a £50,000 R&D tax credit that has not yet been processed by HMRC would be as follows:
Then once the R&D tax credit has been processed by HMRC, the reconciling accounting entries to clear it out of “Corporation tax recoverable” on the balance sheet would be as follows:
This is a brief overview on accounting for R&D tax credits and does not take into account wider considerations such as the potential impact on tax losses on deferred taxation, group tax issues and other related matters. Please reach out for specific assistance.