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Accounting treatment for R&D tax credits

For accounting periods beginning on or after 1 April 2024, the merged RDEC scheme applies to all companies except those that may qualify for enhanced R&D intensive support under ERIS.

The accounting treatment for R&D tax credits depends on which of these schemes you’re claiming under.

Across both R&D tax relief schemes the following applies:

  • R&D costs must be revenue in nature
  • R&D costs may be classified as an intangible asset or must be written off to the income statement as an expense
  • The expenditure rules are the same, but the calculation is different

Accounting treatment for the merged RDEC scheme

The accounting treatment for merged scheme operates in same way as the previous RDEC scheme, with an above the line credit. This is treated as income when calculating profit before tax and shows the positive impact on profit before tax.

The tax credit is calculated as 20% of the qualifying R&D expenditure. The relief is treated as a reduction to your payable corporation tax, offset against the corporation tax liability. Where possible, this will be taken as a tax credit, or any credit remaining can be group relieved or carried forward to future periods.

The PAYE cap under the merged RDEC scheme

The expenditure credit or tax credit amount you receive in the accounting period cannot exceed the PAYE cap, unless you’re exempt from the cap. The PAYE cap amount is £20,000 plus 300% of the company’s relevant PAYE and National Insurance contributions liabilities.

If you’re claiming under the merged scheme and the amount exceeds the cap, any excess is carried forward as a Research and Development expenditure credit that you can claim in the next accounting period

Accounting treatment for ERIS

There is an enhanced rate of relief for qualifying loss-making R&D intensive SMEs.

By contrast the accounting treatment under the ERIS scheme shows a below the line benefit, as a corporation tax reduction or tax credit. This operates in a similar way to the SME R&D scheme that is applicable for accounting periods prior to 1 April 2024.

Credits are non-taxable and only affect the tax charge. The enhanced deduction reduces your taxable trading loss. The additional 86% deduction will be deducted in the trading profit calculation. The maximum loss that can be surrendered is the lower of the remaining trading loss available and the total enhanced R&D expenditure.

Further explanation of “above the line credit”

In accounting and finance, ”above the line credit” typically refers to a credit (or income) that appears above the line on the income statement:

  • The “line” usually refers to Operating Income or Gross Profit
  • Items above the line are part of core business operations—revenues and expenses directly related to producing goods or services
  • Items below the line are non-operating—like interest or taxes

So, an above the line credit would be:

  • A positive adjustment (credit) to revenue or a reduction in operating expenses
  • It affects gross profit or operating income, and therefore has a direct impact on EBIT (Earnings Before Interest and Taxes)
  • Above the line credits improve operational performance metrics like EBIT or EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation)
  • Below the line credits improve net profitability, but don’t reflect core business operations

Reviewed by Deborah Chapple, Quality & Review Director| 10 December 2025

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