If you’re a small to medium-sized company looking to make innovations in the world of science and technology, you could be eligible for research and development (R&D) tax credits.

If you qualify, you can claim back some of the money your business spends on carrying out activities that contribute towards those all-important breakthroughs in your field.

Applying for R&D tax credits is only the first step. You’ll also have to be aware of the correct accounting methods. If you’re unsure about how to do so, here’s a handy guide to help you.

How does the SME R&D scheme work?

There are two main R&D schemes available to innovative businesses: the SME scheme and the research and development expenditure credit (RDEC) scheme.

To be eligible for the SME scheme, you must meet the following criteria:

  • have fewer than 500 staff (including any staff related to the company through shareholders and shareholdings).
  • have a turnover of under €100m or balance sheet assets under €86m.

Under the SME scheme, businesses can deduct 130% of qualifying expenditure from their annual profit, on top of the usual 100% deduction. If the company makes a loss, it can claim a tax credit worth up to 14.5% of the surrendable loss.

You can use the expenditure to lower your corporation tax liability, claim a tax credit or increase carried forward losses.

Accounting for R&D tax credits

The SME R&D regime is a super deduction, so it will not affect your taxable income. As it will be either a tax credit or a reduction to your corporation tax, it’ll show on your profit and loss account.

There’s a three-year time limit for submitting R&D claims but only a one-year limit for submitting your company’s account, so this can mean one is finalised before the other.

If your claim is complete before your accounts, you’ll have to include the total figures in your corporation tax return.

If your claim isn’t complete by the time your accounts are due, you can include them in a prior year adjustment once you’ve finalised the claim.

Changes to SME R&D tax credits

As of 1 April this year, the SME scheme will change. For any companies with an accounting period starting on or after 1 April, HMRC will cut the enhanced deduction from 130% to 86%. The credit rate will also decrease from 14.5% to 10%.

The Government is also running a consultation on further changes to R&D which, if approved, will see the two schemes merge in April 2024. Comments on the proposal are open until 13 March.

We’re here to help

Accounting for R&D tax credits can be complicated, especially if you have to backdate your claims. We specialise in corporation tax planning, so we’re happy to help you account for your SME R&D tax credit claims.

Get in touch to discuss your R&D claims.