What’s the accounting treatment for R&D tax credits?

The accounting treatment for the R&D tax credit will be dependent on which R&D tax credit scheme you are claiming under. The SME R&D tax credit is treated as an 86% tax deduction (prior to April 2023, it was 130%) in the computation. The RDEC tax credit is treated as income (currently 20%) in the income statement.

Under the SME scheme, the accounting treatment for the R&D tax credit is said to be a “below-the-line” benefit. That means that the 86% R&D relief on your qualifying expenditures is deducted in your Corporation Tax Computation. The tax due on the adjusted profit is then shown in your Profit & Loss account (Income statement).

The accounting treatment for an RDEC R&D tax credit is slightly different. The RDEC tax credit is commonly referred to as an “above-the-line” or ATL tax credit. That is because it is treated as grant income for accounting purposes. ATL credits either increase accounting profits or decrease accounting losses. In addition, the fact that is an ATL credit means that it will be taxed.

R&D costs are classified as internal intangible assets. As a result they are governed by a specific set of UK accounting standards – SSAP13/FRS102. 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.

Traditionally tangible assets are capitalised to the balance sheet and depreciated over time. That is because 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.