Accounting for UK R&D expenditure credit
A new research and development expenditure credit scheme has been
introduced in the UK for larger companies. Under this scheme,
depending on a company’s particular circumstances, the credit
may be accounted for within profit before tax rather than as a tax
The UK government has introduced a new research and development
expenditure credit (RDEC) scheme that will replace the current
R&D tax credit system for larger companies in the UK.
The new RDEC scheme will be available for qualifying expenditure
incurred on or after 1 April 2013 and will initially run alongside
the existing R&D tax credit system. Until 1 April 2016, UK
companies can choose whether to apply the existing scheme or RDEC:
RDEC will replace the existing scheme on 1 April 2016. Once a claim
is made under the new regime, future claims also have to be on this
The new RDEC scheme was substantively enacted on 2 July 2013. No
claims could be made under the new RDEC scheme before the
legislation was fully enacted (this occurred when the Finance Act
2013 received Royal assent on 17 July) but claims made for periods
ending on or after the date of enactment may include R&D
expenditure incurred from 1 April 2013. For full and interim
reporting periods ending 30 June 2013, the existing R&D
accounting policy should be applied.
One of the government’s aims in changing the current scheme is to
encourage more research and development by large companies by making
the benefits 'more visible and certain'. The credit is taxable
itself and is administered through the tax system, although it is
not specifically a tax measure. However, the amount payable can in
some circumstances be affected by the tax situation of the company.
In our view there is an accounting policy choice to take the credit
'above the line' within profit before tax or as an income tax
credit, which is the approach generally adopted under the existing
R&D tax credit regime. In making the appropriate choice it
is likely that companies would have regard to their own particular
circumstances and the way in which they expect to recover the
Deciding between 'above the line' and
For those reporting under EU-IFRSs, some forms
of government assistance fall within the scope of IAS 20, the
standard dealing with government grants, and others fall within the
definition of an ‘income tax’ and are therefore covered by the taxes
standard. We do not believe that the RDEC falls directly
within either standard, since it is government assistance delivered
through the tax system but which relates to specific expenditure
rather than, for example, being a reduction in the tax rate.
In our view it should therefore be accounted for by analogy
either as a government grant under IAS 20 ('above the line') or as a
tax under IAS 12, whichever best reflects the economic substance of
the arrangement. This should be judged in the light of all
relevant facts and circumstances.
One of the key policy aims of the RDEC is to ensure that
companies derive the same benefit irrespective of their corporation
tax position and some of the characteristics of the new credit would
support 'above the line' accounting in many cases. However,
there are also arguments in support of accounting for the credit as
a tax, in the same way as for the existing R&D tax credit.
Practice in this new area may develop over time but at present it
is likely to be mixed and it will be difficult to rule out either
approach. As noted above, companies will need to consider the
characteristics of the RDEC in the light of their own particular
circumstances in determining which of the two treatments best
reflects the way in which they will benefit from the new credit.
Treatment as a grant
To the extent
that the credit relates to R&D expenditure that has been
capitalised, it will either be deducted from the intangible asset’s
carrying value or be recognised as deferred income. If the
R&D has been expensed, the credit will be taken to the income
statement, either as a reduction in that R&D cost or as income
(e.g. other income). The credit is taxable and that tax will
be included as part of the tax charge for the period, with the gross
amount shown above the line.
The credit is recognised once there is reasonable assurance that
the company will comply with the conditions of the RDEC and that it
will be received. We expect that companies generally will be
able to make a reasonable estimate of the amount to be received in
respect of the period.
Treatment as tax
The credit would be
presented as a deduction from the current tax expense, to the extent
that the company is entitled to claim it for the current reporting
period. Any unused amount would be recognised as a deferred
tax asset if it met the general recognition criteria for deferred
Broadly speaking, the same
analysis as set out above would apply under UK GAAP.