The merged R&D expenditure credit goes above the line: it is recognised as income in the profit and loss account, usually within other operating income, and it is then taxed. That much is settled. When to book it, what to do with a loss-maker’s notional tax, and how it interacts with capitalised development costs each have more than one defensible answer, because no accounting standard names the credit. This page gives the mainstream treatment and flags where practice genuinely differs, so the judgement calls get settled with your auditor before the audit rather than during it.
It covers where the credit goes in the accounts, not how it is calculated. The calculation — a taxable credit of 20% of qualifying expenditure, worth between 14.7p and 16.2p per £1 once tax is accounted for — is in our guide to the merged R&D scheme, and everything here takes those figures as read.
Why is the credit “above the line”?
Because it was designed to be. The expenditure credit was created so that R&D support would be visible in operating profit, where boards, lenders and investors look, instead of disappearing into the tax line the way the old SME relief did. The tax rules make the credit itself taxable income, but they say nothing about which line of the accounts it sits on — and the accounting standards never caught up: FRS 102 does not mention the credit anywhere. The treatment everyone uses is reached by analogy with grant accounting, and it has been settled practice since the credit began: income above the line, tax on it in the tax charge.
That silence in the standards is worth knowing about, because it is why competent people can reach different answers on the finer points below.
Where exactly does it go?
Other operating income, in most sets of accounts. The statutory accounts formats supply the caption; showing the credit there keeps it visible and keeps the R&D costs at their full amount.
Can the credit be netted against R&D costs?
Not under FRS 102, in our view — and this is where published guidance most often goes wrong. The idea that you can deduct the credit from the R&D expense comes from international standards: IAS 20 gives IFRS reporters an explicit choice between showing a grant as income and netting it against the related cost. FRS 102 offers no such choice, its general rule is that income and expenses are not offset, and company law says the same.
There is a residual argument that the credit reduces the cost of the R&D rather than being income, so nothing is being offset. It is arguable — but it is the position that has to be defended. If your auditor prefers netting, ask for the reasoning in writing and record the policy in the accounts.
When should the credit be recognised?
In the year the R&D happened, not the year the claim was filed. Once the company can be reasonably assured the claim will be made and paid, both recognition routes FRS 102 allows land the credit in the period the qualifying spend was incurred. Waiting for the CT600 puts it in the wrong year.
Two practical checks before you accrue. First, entitlement can already have been lost: a first-time claimant, or a company that has not claimed in the three years ending with the notification deadline, must file a claim notification within six months of the end of the period of account, and if that was missed there is nothing to accrue. Second, the number moves: the contracted-out rules, the overseas cost restriction and the PAYE cap can each shift the figure materially between a year-end estimate and the filed claim, so accrue an estimate you can stand behind.
What if we capitalise development costs?
The claim is unaffected. Tax relief on qualifying R&D is given when the money is spent, even where the accounts carry the spend as an intangible asset, and nothing further arises as the asset is amortised.
The accounting is a genuine choice: take the credit to income in the year of the spend, following the entitlement, or spread it over the asset’s life to match the amortisation it funds. The two give materially different operating profits. Settle it with the auditor and hold the policy consistently.
What lands in the tax charge?
The tax on the credit — and, for a loss-maker, the notional tax withheld from the payable amount. On £100,000 of qualifying expenditure:
| Profitable, 25% main rate | Loss-making | |
|---|---|---|
| Operating income, above the line | £20,000 | £20,000 |
| In the tax charge | £5,000 | £3,800 notional |
| Net benefit | £15,000 of tax saved | £16,200 in cash |
The judgement sits on that £3,800. It is not tax the company has paid: it can be surrendered to a group company, and whatever is left must be used against the company’s own corporation tax in a later period — but it is never paid out in cash. So is it simply part of this year’s tax charge, or an asset? Most loss-makers charge it and recognise nothing, because recognising a deferred tax asset means showing that future taxable profits are probable, and a company with unrelieved losses usually cannot. The same question arises on any amount held back by the PAYE cap and carried forward.
Where does it sit on the balance sheet?
As a debtor for the amount coming in cash, and as a reduction of the corporation tax creditor for the amount that discharges tax. The debtor is often captioned corporation tax recoverable, sometimes other debtors; either can be supported. Keep the cash-versus-tax split visible — it is the number auditors ask for most and get least.
How is ERIS different?
ERIS sits below the line. Its extra deduction has no accounting entry at all — it lives in the tax computation, enlarging the loss the credit is then computed on — and the payable credit, which is not itself taxed, is presented within the tax line, as the old SME credit was.
The practical consequence: which scheme a loss-making SME falls into changes where the benefit appears in its accounts. Under the merged scheme the credit sits in operating income, so it lifts operating profit and EBITDA; under ERIS the whole benefit sits in the tax line, so it lifts neither. A company that drops below the 30% intensity threshold, or climbs above it, can therefore show a very different operating profit from one year to the next without the underlying business changing. If a lending covenant, an earn-out or a management bonus is measured on operating profit or EBITDA, work out which side of the line the benefit will land before the year end, not after.
What should you give your accountant or auditor?
A schedule that supports the accounting entry, not just the tax return. For every claim we prepare, the client receives qualifying expenditure by category and by project, the credit calculation with the payment steps worked through, the notional tax applied and why, any PAYE cap restriction and carry-forward, and the split between cash expected and tax discharged. The entitlement points that decide whether an accrual is supportable sit on the same schedule.
Questions finance directors ask
Can we recognise the credit before we have filed? Yes — in the year the R&D was done, provided the claim will be made and the amount can be estimated reliably. Confirm the claim notification position first, because that is the one condition that may already have failed.
Our auditor wants the credit netted against R&D costs. Are they right? Under FRS 102 we would push back: the netting option they have in mind belongs to international standards, and UK GAAP’s own rules point the other way. If they hold the view, ask for it in writing and record the policy.
Does the accounting treatment affect what we can claim? No. The claim follows the tax rules and the qualifying spend. The accounts only decide how the same amount is presented and when — which moves operating profit, covenant headroom and the tax charge, but never entitlement.
Talk it through with a chartered adviser
The accounting for the merged credit is where R&D advice and financial reporting meet, and the questions above are best answered by the specialist adviser and the auditor together rather than in sequence. LimestoneGrey is a firm of Chartered Tax Advisers and Chartered Accountants, regulated by ICAEW, specialising in R&D tax relief. Every claim is signed off by a chartered adviser, and enquiry support is included as standard.
If you want the credit computed and documented so it can be booked with confidence, get in touch, or start with the full R&D tax relief guide.
Sources
- CTA 2009 s1042H — “Expenditure credit to count as taxable receipt”: the claimed credit is brought into account as a receipt in calculating trade profits for corporation tax.
- CTA 2009 s1042K — the notional tax deduction at step 2, computed at the main rate or, in any other case, the standard small profits rate.
- CTA 2009 s1042L — subsection (2), surrender of the deducted amount within a group; subsection (3), the balance applied in discharging corporation tax for a subsequent period. No provision for payment in cash.
- CTA 2009 s1042J — the amount restricted by the PAYE cap added to the credit for the next accounting period.
- FRS 102 (September 2024 edition), FRC — paragraphs 5.5 and 5.7, requiring one of the statutory profit and loss formats; 2.96, the general prohibition on offsetting income against expenses; 24.3, the scope exclusion for assistance given as reliefs and deductions or determined or limited on the basis of income tax liability; 24.3A, reasonable assurance; 24.4, the performance and accrual model policy choice; 24.5B(a), 24.5C, 24.5E and 24.5F, recognition under each model; 24.5G, the prohibition on netting an asset grant against the asset; 29.7, deferred tax assets recognised only to the extent recovery is probable. The standard contains no reference to the R&D expenditure credit.
- Amendments to FRS 102 and other FRSs — Periodic Review 2024 (FRC) — the amendment to paragraph 24.3, and Basis for Conclusions paragraph B24.6 recording that the description of government assistance delivered through the corporation tax system excluded from Section 24 was refined.
- SI 2008/410, Schedule 1 — paragraph 8, the prohibition on setting income off against expenditure; “Other operating income” as item 6 of Format 1 and item 4 of Format 2.
- IAS 20 Accounting for Government Grants and Disclosure of Government Assistance (IFRS Foundation, 2021 issued standards) — paragraph 2(b), the scope exclusion for benefits determined or limited on the basis of income tax liability, with investment tax credits as an example; paragraph 7, recognition on reasonable assurance; paragraph 29, presentation either as income or deducted from the related expense; paragraph 31, both methods acceptable.
- ‘Above the Line’ credit for R&D: summary of responses (HM Treasury, December 2012) — Annex A: IAS 12 and IAS 20 identified as the standards to consider; most respondents treating the credit as an investment tax credit outside both; the majority view that the gross credit is recognised above the line with a corresponding entry in the tax line; the government’s conclusion that the fully payable credit can be accounted for above the line under both UK GAAP and IFRS.
- Research and development tax credits reform: Above the Line (HMRC tax information and impact note) — the policy objective of “a more visible, more certain, and more effective form of R&D relief”.
- CIRD81450 — CTA 2009 s1308: expenditure recognised as an intangible asset is still deducted when incurred, and relief is not given again on amortisation.
- Merged scheme & ERIS guidance — the merged credit “liable to Corporation Tax as it is classed as trading income”; the ERIS payable credit “not liable to tax” and worth up to 14.5% of the surrenderable loss; the 186% total deduction.
- CIRD89705 — RDEC introduced as “a stand-alone credit to be brought into account as a receipt in calculating the profits” of large companies, the architecture the merged scheme carried over.