Accounting for RDEC explained
The accounting treatment for the RDEC differs from that of the SME scheme. In the latter, the process is straightforward: R&D credits are non-taxable and therefore only impact your tax charge. However, with RDEC claims, the credit can be recognised above the line, meaning it’s visible in your accounts. Here, we explain accounting for RDEC, helping businesses that are using the scheme to understand how the tax credit is treated.
Accounting for RDEC claims
When it was introduced, RDEC was promoted for the fact that it’s an above-the-line credit, meaning it can be shown as income when calculating accounting profit-before-tax. Credit claimed through the scheme is therefore taxable and, subject to certain conditions, it could be available in cash to loss-making businesses.
The RDEC 7 steps
The aim of the RDEC scheme is to ensure both profit and loss-making companies are treated equally, hence the taxable credit, which is only paid out net of tax. Claims under the scheme are typically complex and must follow a seven-step process which determines how credit is received and ensures greater accuracy on the claim.
The steps must be followed in order and, in some circumstances, the credit due will be carried forward for use at a later period. Here are the steps in brief:
- The gross RDEC rate (12%) is offset against your Corporation Tax bill for the period that the claim relates to.
- If, after Step 1, the remaining amount is more than the net value of the credit, the balance is carried forward for subsequent periods.
- A cap is placed on the cash credit based on the PAYE and NIC contributions made by your company for the employees involved in the R&D activity. Amounts in excess of this cap are carried forward.
- If outstanding Corporation Tax is owed to HMRC for other accounting periods, the credit is used to offset this before being paid to your company.
- At this point, credit can be surrendered to a group company to be offset against their CT liability. This is optional, however, and your business can still receive the cash payment.
- If other taxes such as PAYE or VAT are outstanding, HMRC will use any remaining credit to offset these.
- The cash credit is then paid to your company.
While not compulsory, you can choose to have the gross RDEC credit recognised above-the-line on your income statement. The precise accounting for RDEC will depend on when the claim is prepared in relation to the filing of your accounts and how reliably the RDEC figures can be measured. For this reason, businesses are often strongly advised to seek help from an R&D tax specialist when calculating their claim.
Receive assistance with your RDEC claim
When claiming RDEC, HMRC expects businesses to support their claim and follow the process outlined above. R&D Tax Solutions in Manchester has experience in helping large companies to calculate their due credit and make a successful claim. Contact us today on 0161 298 1010 for expert advice.