How to account for SME R&D tax credits

Jun 20, 2022 | Digital accounting

How you account for research and development tax credits differs depending on the size of your business.

Having the schemes available to you is a benefit and can help your company reach its goals.

For SMEs, it’s a much simpler process than if you were to receive RDEC, but still comes with its difficulties to the untrained.

But don’t worry – Blue Shore is here to help you understand how to account for SME R&D tax credits.

Applying for SME R&D

If your SME has less than 500 staff and a turnover of under €100m or a balance sheet total under €86m you can apply for the SME R&D tax credit scheme.

However, your SME status can be affected by external investors, so you may need to include investment figures of the connected companies and partner companies in your tax returns.

You cannot claim SME R&D relief if the project you’re working on is already receiving other state aid or if you have been subcontracted to carry out the R&D work.

Accounting for SME R&D tax credits

Thankfully, accounting for SME R&D tax credits is relatively straightforward as it doesn’t count as taxable income. 

SME R&D tax credits will be shown in your income statement as a corporation tax reduction or a credit.

If you received your credits before finalising your annual accounts, you can simply include the amount in your corporation tax return. 

Or, if you receive it after your accounts are finalised you can just make an adjustment for the year the claim was made. This is because the deadline for filing your corporation tax return usually falls later than the filing for your statutory accounts.

Double entry accounting 

There is a specific method of bookkeeping for your SME when you have claimed R&D tax credits. 

This is called ‘double entry’ accounting, and as the name suggests it involves reflecting the credits in your balance sheet and income statement.

As mentioned, SME R&D tax credit claims are below-the-line benefits. If the credit claims reduce your tax liability you will need to reflect this.

To post your pre-R&D claim tax charge you will need to include:

  • (Debtor) corporation tax charge to your income statement
  • (Creditor) corporation tax charge to your balance sheet.

If you are receiving or have received a refund of the tax paid:

  • (DR) bank on your balance sheet
  • (CR) corporation tax on your balance sheet.

If you are expecting a tax credit:

  • (DR) corporation tax on your balance sheet
  • (CR) corporation tax charge on your income statement.

And finally, when you receive your credits from HMRC:

  • (DR) bank on your balance sheet
  • (CR) corporation tax on your balance sheet.

If you are still unsure

It can sometimes be a bit overwhelming to deal with all of the bookkeeping and calculations. 

By getting in touch with the team at Blue Shore you can rest assured everything will be handled. We’ve got this.

Get in touch with our team today.

Ready to go? We’re excited to hear from you.

Let’s get started, as soon as you’re ready. We’re always up for a chat about how we can support you and your business.

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