The accounting treatment for R&D tax credits depends on the scheme you’re claiming under. Find out how to properly account for R&D tax credits and qualifying costs.
Accounting treatment for the R&D credit
The accounting treatment for your R&D tax credit depends on which scheme you’re claiming under.
Accounting periods starting on or after 1 April 2024
For accounting periods beginning on or after the 1 April 2024, most companies will fall under one of the following two schemes:
- The Merged R&D Expenditure Credit (RDEC) scheme
- The Enhanced R&D Intensive Support (ERIS) scheme for loss-making, R&D-intensive SMEs
Both the merged scheme and ERIS follow the same accounting treatment as the original RDEC scheme:
- They are above-the-line (ATL) credits
- The credit is treated as “other income” in your profit and loss (P&L) statement
- This improves EBITDA and operating profit, but is subject to Corporation Tax
While ERIS offers a higher payable rate (up to ~27%) for qualifying loss-making SMEs, its accounting treatment remains identical to the merged scheme.
Accounting periods before 1 April 2024
Some companies may still be claiming under previous schemes for accounting periods that began before 1 April 2024:
- SME scheme: This is a below-the-line tax deduction. You apply an enhancement (currently 86%) to qualifying R&D costs in the Corporation Tax computation, which reduces the tax liability shown in the P&L.
- RDEC scheme (legacy): As noted above, this is an above-the-line credit, shown as income in the P&L and taxed accordingly.
Accounting treatment for qualifying R&D costs
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 an S1308 election, which states that costs have been capitalised for accounting purposes and adjusted in the tax computation to become revenue expenses.
