Accounting Treatment for R&D Tax Relief: Expert UK Guide [2025]

Accounting Treatment for R&D Tax Relief: A Comprehensive Guide

Are you struggling with how to properly account for R&D Tax Relief UK in your company books? You’re not alone. Many UK businesses find this area complex.

R&D tax relief represents a significant financial benefit for innovative companies. But recording it correctly in your accounts is just as important as claiming it.

In this guide, we’ll walk through the proper accounting treatment for both SME R&D tax credits and the RDEC scheme.

Understanding R&D Tax Relief in the UK

R&D tax relief allows UK companies to claim extra tax relief for money spent on qualifying R&D activities. It comes in two main forms.

For small and medium-sized enterprises (SMEs), the relief works as an enhanced deduction of 186% of qualifying costs from yearly profit. This reduces your corporation tax bill.

For larger companies, the Research and Development Expenditure Credit scheme offers a tax credit calculated at 20% of qualifying R&D expenditure. This is different from the SME scheme in how it’s accounted for.

HMRC doesn’t specify exactly how you must account for these benefits in your financial statements. But following proper accounting practices is vital for accurate financial reporting.

What is the Correct Accounting Treatment for R&D Tax Relief?

The correct accounting treatment for R&D tax relief depends on which scheme you’re using and whether the credit relates to your tax or your profit and loss account. SME relief typically reduces tax liability through corporation tax, while RDEC appears as ‘other income’ in financial statements.

The key question is whether the government support is related to income tax or is separate from the tax system. This determines where the benefit appears in your accounts.

Let’s examine both schemes in detail to understand the differences.

How to Account for R&D Tax Credits in Financial Statements

The accounting treatment differs depending on whether you’re claiming under the SME scheme or the RDEC scheme.

For financial reporting, you need to decide if the credit is a reduction in tax expense (below-the-line) or an increase in income (above-the-line).

Let’s look at both approaches:

Above-the-Line (ATL) Credit Accounting

The RDEC scheme uses above-the-line accounting treatment. This means the credit appears as income in your profit and loss account.

You record the gross credit as ‘other income’ in your income statement. This increases your profit before tax.

The credit is subject to corporation tax, so you’ll need to account for tax on this additional income.

The benefit of ATL treatment is that it improves key performance metrics like EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation).

This accounting method gives more visibility to R&D activities in your financial statements. Investors and stakeholders can clearly see the value of your R&D investments.

Below-the-Line (BTL) Credit Accounting

SME R&D tax relief typically uses below-the-line accounting. This means the benefit appears as a reduction in your tax expense.

You calculate the enhanced deduction and record the tax saving in your corporation tax calculation. This doesn’t affect your pre-tax profit.

BTL credits don’t improve metrics like EBITDA but do enhance your after-tax profit.

For loss-making SMEs that surrender losses for a cash credit, you would record the cash payment as a tax credit in your financial statements.

R&D Expenditure Treatment in Company Accounts

Beyond the tax relief itself, how you treat the actual R&D expenditure in your accounts matters too.

UK accounting standards offer options for how to treat R&D costs. Your choice affects both your balance sheet and profit and loss statement.

Capitalising vs. Expensing R&D Costs

You have two main options for research and development expenditure: capitalise it as an intangible asset or expense it immediately.

Capitalising R&D costs means recording them as an asset on your balance sheet. You then amortise this asset over its useful economic life.

To capitalise R&D, your project must meet specific criteria under accounting standards:

• It must be technically feasible
• You intend to complete it and use or sell it
• You can use or sell the resulting asset
• It will generate probable future economic benefits
• You have adequate resources to complete it
• You can measure the expenditure reliably

Most early-stage R&D (known as research phase) must be expensed through your profit and loss account as incurred. Only development phase costs can potentially be capitalised.

Impact on Balance Sheet and Profit & Loss Statements

Expensing R&D costs reduces your profit immediately but gives you tax relief sooner. It creates no asset on your balance sheet.

Capitalising costs spreads the impact on profit over several years. It creates an intangible asset on your balance sheet.

Your choice affects key financial ratios. Expensing reduces short-term profitability but improves return on assets. Capitalising does the opposite.

For R&D tax relief, you can claim whether you expense or capitalise the costs. But your accounting treatment might affect how you present your claim to HMRC.

Practical Examples of R&D Tax Relief Accounting

Let’s look at real-world examples of how to account for R&D tax relief:

SME Scheme Example

Imagine a profitable SME with:

• £100,000 qualified R&D expenditure
• 19% corporation tax rate
• Enhanced deduction rate of 186%

Step 1: Calculate enhanced deduction £100,000 × 186% = £186,000

Step 2: Calculate tax saving £186,000 × 19% = £35,340

Step 3: Record in accounts

• DR: R&D Expense £100,000
• CR: Cash/Creditors £100,000 (To record R&D expenditure)
• DR: Corporation Tax Expense £35,340
• CR: Corporation Tax Creditor £35,340 (To record tax saving from R&D claim)

The £35,340 reduces your corporation tax bill. In your financial statements, this appears as a reduced tax expense.

RDEC Scheme Example

Now consider a large company claiming RDEC with:

• £500,000 qualified R&D expenditure
• 20% RDEC rate
• 19% corporation tax rate

Step 1: Calculate gross credit £500,000 × 20% = £100,000

Step 2: Calculate net credit after tax £100,000 × (1 – 19%) = £81,000

Step 3: Record in accounts

• DR: R&D Expense £500,000
• CR: Cash/Creditors £500,000 (To record R&D expenditure)
• DR: RDEC Receivable £100,000
• CR: Other Income £100,000 (To record gross RDEC claim)
• DR: Tax Expense £19,000
• CR: Corporation Tax Creditor £19,000 (To record tax on RDEC income)

The £100,000 shows as ‘other income’ in your income statement, improving your operating profit. It’s then taxed at the corporation tax rate.

Common Accounting Mistakes to Avoid

Getting the accounting wrong for R&D tax relief can cause problems with HMRC’s R&D tax relief manual guidelines and affect your financial reporting.

Here are common mistakes to avoid:

Not accounting for R&D tax relief at all. Some companies claim the relief but don’t reflect it properly in their accounts.

Recording SME relief as income rather than as a tax reduction. This incorrectly inflates your operating profit.

Failing to account for the tax payable on RDEC. Remember the credit is taxable.

Inconsistent treatment between years. Changing your accounting approach without good reason may raise questions from auditors.

Claiming 100% of costs that should be apportioned. Only costs directly related to qualifying R&D activities are eligible for relief.

How Recent Changes Affect Your R&D Accounting

The R&D tax relief landscape in the UK has seen several important changes recently.

From April 2023, the enhancement rate for SMEs dropped from 130% to 86%, while the surrender rate for loss-making companies fell from 14.5% to 10%.

The RDEC rate increased from 13% to 20%, making it more generous for larger companies.

These changes affect how much relief you can claim and therefore the amounts you record in your accounts.

New compliance requirements include digital submissions and additional information requirements. These don’t change the accounting treatment but do affect your claim process.

Cloud computing and data costs now qualify for relief, expanding the expenses that can be included in your R&D calculations.

Next Steps: Getting Your R&D Tax Relief Accounting Right

Proper accounting for R&D tax relief isn’t just about compliance. It helps you make better business decisions and present your finances accurately.

Start by determining which scheme applies to your business – SME or RDEC. This defines your accounting approach.

Consult with specialist R&D accountants who understand both the tax and accounting aspects. They can help you set up the right accounting procedures.

Maintain detailed records of all R&D projects and related expenditure. This supports both your R&D claim process and your accounting entries.

Consider how your R&D accounting affects key performance indicators and how stakeholders might interpret the information.

Review your accounting policies annually to ensure they remain appropriate and reflect any changes in legislation.

At R&D Tax Relief UK, we specialise in helping businesses navigate the complexities of R&D claims and accounting. Contact us today to ensure your R&D activities are properly reflected in your accounts.

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Frequently Asked Questions

For more detailed information, please check our comprehensive R&D tax relief FAQs.

Can I change how I account for R&D tax relief?
Yes, but you should have a good business reason and apply the change consistently. You may need to restate prior periods.

Do I need to show R&D tax relief separately in my accounts?
It’s good practice to disclose material R&D tax credits separately or in the notes to financial statements for transparency.

How do I account for R&D tax relief if I’m loss-making?
Loss-making SMEs can surrender losses for a cash credit. This would be recorded as a tax credit in your accounts.

Can I claim R&D tax relief on capitalised development costs?
Yes, the accounting treatment doesn’t affect eligibility. However, capital expenditure has different rules from revenue expenditure.

How quickly should I recognise the benefit in my accounts?
You should recognise the benefit when it’s reasonably certain you’ll receive it, typically when you submit your corporation tax return.