Do Clients Need To Refile Previous Accounts In Order To Claim R&D Tax Credits?

1st Nov 2019
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In a nutshell no, it’s not necessary for a company to refile its accounts in order to make a claim for R&D Tax Credits as an amendment. This is because accountants can simply record it as a prior year adjustment in the client company’s accounts for the following year.

The SME scheme for claiming R&D tax relief and the larger company RDEC scheme (which we’ll look at further down) have separate, differing accounting rules. But the good news is that regardless of which one your client falls under, neither one means restating its accounts. Essentially, any R&D monies owed can become part of next year’s accounting period to be treated as a ‘prior adjustment’.

Step back a bit... what are R&D Tax Credits?

The UK government has long realised that a healthy economy can only exist if companies innovate, grow and take on more staff. Back in the year 2000, it therefore launched the R&D Tax Credits scheme, offering companies a generous tax incentive to help towards the costs involved in research and development (R&D).

It’s open to any Corporation Tax-paying UK company that undertakes any kind of research and development work in a scientific or technological capacity. This could involve creating a new product or service or revamping an existing one. It’s worth having too, as it allows up to 33.35% of a company’s R&D spend to be clawed back as a cash repayment.

Unfortunately we’ve found that many businesses (and accountants) have never heard of R&D Tax Credits, which means they could be missing out on thousands. Find out more about R&D Tax Credits on our webpage.

How do I know if my client is eligible?

Generally speaking, if a company has employed developers, technical specialists or professional engineers with the aim of solving a specific scientific or technological uncertainty then it may well be eligible for R&D Tax Credits. The most important thing is that it can demonstrate its R&D expenditure. It must also be able to explain why it believes the work qualifies for the relief as well as meeting all the application criteria. There are three main areas here:

Technical Uncertainty - the uncertainties that the project is looking to solve must not be easily deducible by an experienced professional, i.e. to qualify for R&D tax relief the solution should not be easily discoverable. Note however that even if the project ultimately fails, the company may well still be eligible for R&D Tax Credits towards the cost.

Innovation - the project should not deliver an outcome that may be classed as ‘common knowledge’, as it would then fail the innovation test for a claim.

Employing specific professionals - if a company has been employing ‘competent professionals’ (for example technical experts in a specific field) as part of a project, then this may well offer a good chance of R&D tax relief eligibility.

Cost - there isn’t a lower limit on R&D expenditure in order to make a claim, however the more money that has been spent on a project the better chance of claim success it often has. This is due to the higher costs involved in the majority of research and development.

The key thing to remember too is there are two branches to the scheme - the SME branch and RDEC. Which one your client claims under depends on a number of factors, but broadly speaking it works like this:

  • If the client is a small to medium sized company with under 500 staff, a turnover of below €100 million or has gross assets of less than €86 million, then it should apply under the SME scheme.
  • If the client’s company is larger in size, with over 500 staff, and has a turnover of more than €100 million or gross assets of over €86 million, then it should apply under the RDEC scheme.

There are some exceptions to the rule however, for example if an SME takes advantage of any state-aided funding, then it will need to apply under the less generous RDEC scheme instead, regardless of size. The team at Myriad Associates will be happy to guide you through this to make sure your client applies for R&D Tax Credits under the correct scheme.

What is the accounting treatment for the SME branch of the scheme?

The accounting treatment for claims under the SME scheme is, mercifully, pretty simple. R&D Tax Credits only impact on a company’s tax bill because they are regarded as non-taxable income.

R&D Tax Credits are received either as Corporation Tax deduction or as a credit, and this is recorded as a below-the-line benefit.

You have a couple of reporting options here: Either you can make a prior year adjustment (for companies that cannot calculate the value of their R&D Tax Credit until their accounts are complete). Or, you can make an adjustment to the Corporation Tax amount to include the R&D tax relief. Companies are allowed to provide either the actual amount or an estimate, because the Corporation Tax deadline is typically after the deadline by which accounts should be filed.

What is the accounting treatment for the RDEC scheme?

Under this scheme, a company’s R&D Tax Credit amount is taxable - it’s therefore above-the-line.

The gross credit amount can be reported as ‘other income’ in the appropriate section of the income statement. Bear in mind that this is optional, not essential. Again, either actual or estimated figures can be used, or it can be added as a prior year adjustment to the next year’s accounting period. Again we can assist you with this if required.

I’m a qualified, experienced accountant - why should I use Myriad Associates?

The rules around R&D Tax Credit qualification are often changing and the process itself is notoriously challenging. Myriad Associates is a team of skilled R&D tax relief professionals and it’s all we do; we don’t provide any other type of accountancy service, just R&D. We offer a fast, professional service to both accountants and businesses alike, giving peace of mind when it comes to dealing with the intricacies of R&D tax relief claims. Not only does this provide your client with the best chance of success, it means they can maximise their benefit too - so you can get on with all their other accountancy needs.

Get in touch with us today

Let us help you to help your clients with their R&D Tax Credit claim. Call us today on 0207 118 6045 or use our contact page.