What is the accounting treatment for R&D tax credits?

The accounting treatment of R&D tax relief will depend on which scheme applies to your project based on eligibility and level of qualifying R&D expenditure.

Accounting Periods Beginning On or After 1 April 2024

For most companies, the merged scheme now applies. The merged scheme has replaced the two previously separate R&D tax relief schemes, the SME scheme and R&D Expenditure Credit (RDEC). For loss-making SMEs, the new ERIS scheme is typically the most suitable scheme between the two.

Merged scheme

• A single taxable credit is available at 20% of qualifying R&D expenditure.
• The credit is generally recognised above the line.
• It increases income before tax and is subject to Corporation Tax.

The credit can reduce a Corporation Tax liability or be paid as a cash credit for loss-making companies, subject to statutory caps and restrictions.

ERIS scheme

• Applies to loss-making SMEs with qualifying R&D expenditure of at least 30% of total expenditure.
• R&D intensive SMEs are eligible for a higher payable credit rate, depending on if they meet the criteria.
• The ERIS scheme has stricter rules for subcontractors and overseas costs.

The scheme was designed to provide enhanced support where a UK company’s activities are heavily focused on resolving technical uncertainty through qualifying R&D.

Accounting Standards Considerations

Companies applying IAS 20 or FRS 102 grant accounting principles should follow those standards when determining the appropriate treatment. In practice, the credit is usually recognised as other income and matched against the related R&D expenditure.

Consistency with UK GAAP or IFRS is essential. The legislation governs eligibility and calculation. The relevant accounting framework then dictates how the credit is presented in the financial statements.