Accounting Treatment of R&D Tax Credits

The structural difference matters more than any presentation question. SME R&D tax relief and Enhanced R&D Intensive Support work as an additional deduction: an extra 86% of qualifying costs comes off taxable profit, giving 186% in total. There is no credit arising as income. The benefit appears in the tax computation and therefore in the tax charge.

An expenditure credit is different in kind. Under RDEC and the merged scheme the relief is a credit calculated on the qualifying expenditure, and it is taxable income rather than a reduction in the tax charge. In the step calculation it is reduced by notional tax at the rate applicable to the company, the main rate of 25% or the small profits rate of 19%, with the small profits rate applied to loss makers.

So the same company, claiming for two adjacent accounting periods either side of 1 April 2024, can have a benefit that lands in the tax line for the earlier period and a taxable credit for the later one. That is a real change in how the results read, not a presentational preference.

HMRC's Corporate Intangibles Research and Development Manual has an accountancy section, and it deals with the accounting treatment of R&D expenditure under the relevant standards. The FRS 105 page, for example, explains that section 13 of FRS 105 covers intangible assets other than goodwill and requires all R&D expenditure to be written off as incurred.

That is the expenditure side. There is no equivalent HMRC instruction on where the credit is presented, because presentation is not a tax matter. The manual is also the place where the requirement that activities fall to be accounted for as R&D under generally accepted accounting practice is relevant, which is a genuine link between the accounts and the claim.

Where a taxable expenditure credit appears in the profit and loss account follows the reporting framework the company applies, whether that is FRS 102, FRS 105 or IFRS, and the judgement belongs to whoever prepares and signs the accounts. It is not something a tax adviser settles unilaterally and it is not something HMRC has ruled on.

We are not going to assert a specific line here, because we cannot source it, and this site does not state things it cannot source. What we will do on an engagement is set out the tax position clearly enough for the accounts preparer to make the call: the gross credit, the notional tax, the resulting net figure, and which period each falls in.

If your auditor or accounts preparer has a settled house view, that view governs. If they do not, the question to put to them is which framework applies and whether the credit is presented as other income or netted against the related R&D costs.

Three practical ones. First, which period the credit belongs in, which is a recognition question rather than a presentation one and depends on when entitlement arose. Second, whether the accounts describe the company as a going concern in a way that depends on receiving the credit, because that breaches the going concern condition set out on the eligibility page and can invalidate the claim.

Third, whether the claim and the accounts tell the same story about what was R&D. The condition that activities fall to be accounted for as R&D under generally accepted accounting practice means a claim describing work the accounts treat as something else is an inconsistency a compliance check will find. HMRC's accountancy guidance sits inside its Corporate Intangibles Research and Development Manual, and the British Business Bank gives the plain overview of what qualifies in the first place.