Any costs directly relating to the R&D can be deducted as ‘R&D qualifying expenditure’ in the income statement. However, the accounting treatment for R&D relief will be dependent on which R&D tax scheme you are claiming under. SME relief is treated as a 130% tax deduction in the computation, whilst RDEC is treated as income (currently 13%) in the income statement.
Under the SME scheme, the accounting treatment is said to be a “below-the-line” benefit, i.e. the 130% R&D relief on qualifying expenditure is deducted in your Corporation Tax Computation and tax due on the adjusted profit is then shown in your Profit & Loss account (Income statement).
The accounting treatment for an RDEC claim is slightly different. They are commonly referred to as “above-the-line” or ATL tax credits, as they are treated for accounting purposes as grant income, thus increasing accounting profits or decreasing accounting losses. Ultimately, this means the RDEC credit will be taxed.
Accounting Treatment for R&D Costs
R&D costs are classified as internal intangible assets, and are governed by a specific set of UK accounting standards – SSAP13/FRS102 (financial accounting policies, practices). SSAP 13 states that R&D costs should be written off to the income statement as an expense, therefore either reducing accounting profit, or increasing accounting losses.
A business spends money on research and development with the hope that it will lead to increased cash flow for the business in the future.
Traditionally tangible assets are capitalised to the balance sheet and depreciated over time, as they have enduring value to the business (e.g. fixed assets or long-term investments). Expenses on the other hand are written off to the income statement (profit and loss account) where they will decrease accounting profit or increase the accounting loss.
R&D revenue expenditure is classified as an intangible asset, i.e. an asset which cannot be touched or seen. Intangible assets can be classified as either purchased (external) or internal. Purchased intangible assets are treated in the same way as tangible assets – they are capitalised to the balance sheet and amortised over time. Internally generated intangible assets however are not seen to directly increase future cash flow, and as stated in SSAP 13 should be treated as an expense in the income statement.
For the majority of SME claims, expensing R&D to the P&L is more straightforward and common practice. It is possible for intangible assets which have been capitalised to the balance sheet to be included in the claim. Where this is the case the company can make a S1308 election, which states that costs have been capitalised for accounting purposes and adjusted in the tax computation to become revenue expenses.