Capitalised Costs and R&D Tax Claims. What are the Rules?
At YesTax, we are often asked by our clients and partner accountancy firms about the issue of capitalised costs and R&D tax relief. There is often confusion – and it’s perfectly understandable why this is the case.
HMRC’s R&D tax ‘bible’, the CIRD manual, is often the source of this confusion. This online resource is often the first place advisers and clients turn to when wanting an answer to an R&D query. Contained in CIRD 81700 is the statement
To be eligible as qualifying R&D expenditure, expenditure must be allowable as a deduction in calculating the profits of the trade. Capital expenditure is therefore excluded
This seems to end the confusion – and may clients and advisers will conclude that any expenditure which ends up on the balance sheet will be ineligible for R&D tax relief. Having read the above statement, this is a perfectly reasonable conclusion to make. However, this is not the case. CIRD81700 then states that
The accounts treatment (involving either recognition of an asset on the balance sheet or the write off of expenditure immediately to the profit and loss account) is not conclusive of whether the expenditure is revenue or capital for tax purposes.
What this hints at is that capitalising costs in the accounts does not mean the expenditure is capital for tax purposes – and if the expenditure isn’t capital for tax purposes, then it may be allowable for R&D tax relief. CIRD 81700 then provides a helpful link to another part of the manual (CIRD 81450) which clarifies the situation regarding capital costs in the accounts which are revenue for tax purposes.
CIRD 81450 outlines three requirements for costs to be included in an R&D claim which have been capitalised in the accounts. In summary, these are:
- The cost must be included as an intangible asset in the accounts (and not tangible)
- The cost must be an allowable cost in calculating the taxable profit for the period under observation
- The cost is actually incurred in the period under observation
If these three requirements are met, nothing precludes the expense from being included in an R&D tax claim, providing of course it is a qualifying cost. A final point to note is that if the whole cost is given full relief in the year it is incurred, any subsequent amortisation of the asset in the accounts must be disallowed for tax purposes in future years. This is because the company will have enjoyed full tax relief in the year the expense was incurred, and if future amortisation of the asset is allowed for tax purposes, the company would be incorrectly ‘double claiming’ tax relief.
From a practical perspective, it is common to see the following costs being capitalised (as an intangible fixed asset) and being included in an R&D tax claim:
- Staff costs which have been capitalised and which were incurred on a qualifying project
- Subcontractor costs which have been capitalised and which were incurred on a qualifying project
- Certain capitalised software costs which were incurred on a qualifying project
As ever, if you have any questions about your claim and the possible inclusion of capitalised expenditure, contact us