Accounting for R&D tax credits and the expenditure credit

Q: How is the RDEC recognised under Section 24?

When. Paragraph 24.3A says a grant is not recognised until there is reasonable assurance that the company will comply with the conditions and that the grant will be received. A company with a strong claims history and a completed technical report may reach that point at the year end; a first time claimant with an unclear project may not. Which model. Paragraph 24.4 requires a choice of the performance model or the accrual model, class by class. Under the accrual model a revenue grant is recognised over the periods in which the related costs are expensed (24.5D), which in practice means the year the R&D spending hits profit or loss. Capitalised development. Where development costs are capitalised under Section 18, the related credit is a grant relating to an asset under the accrual model and is released over the asset's useful life (24.5F). Paragraph 24.5G requires the deferred part to be shown as deferred income, not deducted from the asset. See capitalising development costs. Measurement. Grants are measured at the fair value of the asset received or receivable (24.5), which for the RDEC is the gross credit. The tax that HMRC deducts in the payment steps is not a reduction of the grant. It is the corporation tax on a taxable receipt, and belongs in the tax charge. More detail on Section 24 is in accounting for government grants.

For accounting periods beginning on or after 1 April 2024 a company claims either the merged R&D expenditure credit (RDEC) or, if it is a loss making R&D intensive SME, enhanced R&D intensive support (ERIS). The RDEC is a taxable credit of 20% of qualifying expenditure that is designed to sit “above the line” as income, so under FRS 102 it is accounted for like a government grant and the tax on it goes in the tax charge. The ERIS payable credit is not taxable and is obtained by surrendering a tax loss, so it belongs in the tax line under Section 29.

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Which credit does the company actually have?

HMRC’s guidance explains that the merged RDEC scheme and ERIS replaced the old RDEC and SME schemes for accounting periods beginning on or after 1 April 2024. The merged RDEC rate is 20% (section 1042G CTA 2009), or 49% for ring fence trades. ERIS is available only to SMEs that make a trading loss for tax purposes before the extra deduction and meet the intensity condition, which for periods beginning on or after 1 April 2024 requires relevant R&D expenditure to be at least 30% of total expenditure. It gives an additional deduction of 86% of qualifying costs and a payable tax credit of up to 14.5% of the surrenderable loss.

The accounting follows from the legal character of each credit, so the first step is to confirm which scheme the claim is under. The qualifying rules are summarised in the R&D tax relief overview; this page deals only with the accounts.

Why does the RDEC go above the line?

Section 1042H CTA 2009 requires a company that claims an expenditure credit to bring it into account as a receipt in calculating the profits of its trade, and HMRC’s manual at CIRD112000 says the gross RDEC must be accounted for as trading income for the period of the claim, either in the accounts or in the tax computations. HMRC describes the merged RDEC as a taxable credit rather than a relief (CIRD111000).

This design goes back to Finance Act 2013, whose explanatory notes describe the original scheme as an “Above the Line” credit. HMRC’s worked examples at CIRD89910 show the credit as other income.

FRS 102 paragraph 24.3 excludes from Section 24 government assistance given through reliefs in computing taxable profit, or determined or limited by reference to income tax liability, and sends that to Section 29. The RDEC is calculated on expenditure, is itself taxable, and can be paid in cash to a company with no tax liability, which is why it is accounted for as a grant rather than as a reduction in tax.

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How is the RDEC recognised under Section 24?

When. Paragraph 24.3A says a grant is not recognised until there is reasonable assurance that the company will comply with the conditions and that the grant will be received. A company with a strong claims history and a completed technical report may reach that point at the year end; a first time claimant with an unclear project may not.
Which model. Paragraph 24.4 requires a choice of the performance model or the accrual model, class by class. Under the accrual model a revenue grant is recognised over the periods in which the related costs are expensed (24.5D), which in practice means the year the R&D spending hits profit or loss.
Capitalised development. Where development costs are capitalised under Section 18, the related credit is a grant relating to an asset under the accrual model and is released over the asset’s useful life (24.5F). Paragraph 24.5G requires the deferred part to be shown as deferred income, not deducted from the asset. See capitalising development costs.
Measurement. Grants are measured at the fair value of the asset received or receivable (24.5), which for the RDEC is the gross credit.

The tax that HMRC deducts in the payment steps is not a reduction of the grant. It is the corporation tax on a taxable receipt, and belongs in the tax charge. More detail on Section 24 is in accounting for government grants.

How do the payment steps affect the balance sheet?

CIRD112100 sets out the steps that decide what happens to the credit once claimed. Step 1 uses it to discharge the company’s corporation tax for the period. Step 2 applies a notional tax deduction at the main rate for companies with profits chargeable at that rate, or the small profits rate for others; that amount can be surrendered to a group company or carried forward against future tax. Step 3 applies the PAYE cap of £20,000 plus 300% of relevant PAYE and NIC liabilities, with any excess carried forward. Later steps set the balance against other periods’ corporation tax, allow group surrender, set it against other HMRC liabilities such as VAT or PAYE, and pay any remainder in cash if the company is a going concern and has no enquiry open.

In the accounts this means the credit receivable is often settled partly by offset against the current tax liability and partly in cash, and some may be carried forward. The receivable should be measured at what is expected to be recovered, and any amount restricted under steps 2 or 3 needs separate tracking.

Illustration only. A profitable company paying the main rate of 25% spends £1,000,000 on qualifying R&D. The gross RDEC of £200,000 is recognised as other operating income. Corporation tax of £50,000 on it is included in the tax charge, giving a net benefit of £150,000 after tax.

How is the ERIS payable credit accounted for?

ERIS works through the tax computation. The 86% additional deduction increases the trading loss, and the company may then surrender all or part of its surrenderable loss for a payable credit at 14.5% (CIRD122000; section 1058 CTA 2009). HMRC states that the ERIS tax credit is not taxable income of the company.

Because the credit is obtained by surrendering a tax loss and is not taxable, it falls within paragraph 24.3 and is accounted for under Section 29 as part of the tax line, with a matching current tax asset. Paragraph 29.5 measures current tax assets at the amount expected to be recovered under enacted or substantively enacted law. Any part of the loss not surrendered is carried forward and is considered under the deferred tax rules in paragraph 29.7; see deferred tax.

HMRC’s own example at CIRD122000: Company A, a loss making R&D intensive SME exempt from the PAYE cap, has a trade loss of £50,000 before the extra deduction and qualifying expenditure of £100,000. The additional deduction of £86,000 increases the loss to £136,000, which is lower than the enhanced expenditure of £186,000, so £136,000 can be surrendered for a credit of £19,720. Company A shows the full £100,000 of R&D cost in its operating results and a tax credit of £19,720 in its tax line. If it had £100,000 of other income, its unrelieved loss and therefore its credit would be much smaller.

What if the claim is made after the year end?

CIRD181000 explains that a claim is made in the company tax return or an amended return, must be supported by an additional information form, and may require advance claim notification; if either requirement is missed, the claim is invalid. Under CIRD183000 the claim notification period ends six months after the end of the period of account, unless an exception applies, such as a claim in the previous three years. Claims can normally be made up to two years after the end of the period of account.

For the accounts this means a credit should not be accrued where a required claim notification was not made in time. Where a claim is made but its eligibility is genuinely uncertain, an ERIS credit is an uncertain tax treatment under paragraphs 29.17A to 29.17C, while an RDEC receivable is tested against the reasonable assurance condition in paragraph 24.3A. Paragraph 29.17C treats new information about an uncertain tax treatment, such as the outcome of an HMRC challenge, as a change in accounting estimate; see R&D enquiries.

What needs to be disclosed?

The grant accounting policy, the nature and amount of grants recognised, and any unfulfilled conditions (24.6), for an RDEC.
The aggregate R&D expenditure expensed in the period (18.29).
The components of the tax charge and the reconciliation of the tax charge to profit multiplied by the applicable rate (29.26 and 29.27(b)), where an ERIS credit or tax on the RDEC will often be a reconciling item.

What are the common mistakes?

Putting the merged RDEC in the tax line as if it were the old SME credit, which understates operating profit and misstates the tax reconciliation.
Treating the ERIS credit as other income, even though it is not taxable and arises from surrendering a loss.
Recording the RDEC net of the notional tax restriction instead of gross, with tax in the tax charge.
Releasing the whole credit at once when the related development spending has been capitalised.
Accruing a credit for a period where the claim notification deadline has been missed.
Forgetting that RDEC used to discharge corporation tax is still income, not a reduction in the tax charge.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.