Capitalisation of R&D - Can I receive tax relief on capitalised R&D expenditure? And is it in my interest to do so?

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Capitalised costs and how they relate to R&D tax relief can be confusing to both companies and their accountants. As a business owner, you may wonder if you can receive tax relief on capitalised R&D expenditure. The answer is yes - in certain circumstances, UK companies can claim R&D tax relief on capitalised costs.

** PLEASE NOTE** - in this article we are talking about expenditure that might normally be treated as revenue expenditure being capitalised. Capital expenditure that should be capitalised as a tangible asset is a different matter and is not applicable here. That expenditure may qualify for Capital Allowances, potentially Research & Development Allowances (RDAs).

Why capitalise development costs?

Under FRS102 you have the choice to either expense or capitalise certain development costs, assuming such costs meet the criteria set out in the relevant legislation. The reasons for choosing to capitalise is usually as simple as wanting to capture the fact that an asset has been created that will have a future benefit to the company.

Can you claim R&D tax on capitalised R&D spend?

Costs that have been capitalised in the accounts can still qualify for R&D tax relief, provided that they meet certain criteria. The legislation governing this is s. 1308 Corporation Tax Act 2009.

Provided that: the expenditure has been capitalised as an intangible asset; it is not otherwise prevented from being an allowable deduction in the calculation of profit in that period; and the expenditure is incurred during the accounting period, then you can claim R&D tax relief on that spend. Of course, that spend then needs to meet all other requirements to be eligible for R&D tax relief.

Does this expenditure need to be removed from the balance sheet to be able to include it into an R&D claim?

No. The relevant expenditure can remain on the balance sheet and there is no need to restate any accounts. All adjustments required to be made to make the claim for R&D relief can be made in the tax computations.

ABGI can help!

Capitalising qualifying costs as an intangible asset, should not affect a company’s ability to claim R&D tax relief on those costs - provided that:

  • the costs have been capitalised as an intangible asset (and not tangible);
  • they would otherwise be treated as revenue in nature (allowable as a deduction in computing the profit);
  • they are incurred during the period; then they should still be eligible for the relief.

This assumes that the costs themselves are eligible as part of a qualifying project. One thing to remember,  is that all amortisation of those costs would need to be added back to avoid ‘double-dipping’.

There are some adjustments (such as the amortisation add-back) that need to be made to the tax computations to accommodate this, but we could explain these to you as-and-when required. No adjustments would need to be made to the balance sheet as a result of claiming the relief on those costs.

If you have any questions or would like further information on how ABGI can help your business, please contact ABGI-UK.