Q&A: Research and Development claim

In our regular Q&A series from Croner Taxwise, tax adviser, Laura Burrows CTA explains if an R&D claim can still be made if the revenue expenditure is not shown in the profit and loss account for the period the project ran

Q. My client company is undertaking a research and development project and I have capitalised the costs incurred during the period as an intangible fixed asset in the accounts. These costs are predominately staff costs and sub-contractor payments and would qualify for R&D tax relief under the SME scheme. Does the fact that this revenue expenditure is not shown in the profit and loss account for the period mean that it cannot be included in the companies R&D claim?

A. To qualify for corporation tax relief under the SME scheme s1044(5) Corporation Tax Act (CTA 2009) states that the qualifying R&D expenditure must be allowable as a deduction in calculating the profits of the trade for the period.

Subject to restrictions for certain business-related intangible assets (goodwill, etc.) the general rule for corporation tax relief for the costs of intangible assets is that the tax treatment follows the accounting treatment.

It would therefore appear that the company can only receive tax relief for these costs and benefit from the additional R&D deduction when they are amortised.

However, in these circumstance s1308 CTA 2009 provides that R&D expenditure that is not of a capital nature and is brought into account in determining the value of an intangible asset is not prevented from being allowable as a deduction in calculating the company’s profits for corporation tax purposes.

This will therefore work to allow a tax deduction for 100% of the qualifying expenditure incurred in the accounting period which in turn would then qualify for the additional 130% deduction calculated in accordance with the R&D rules in Part 13 of CTA 2009 being the total staff costs and 65% of sub-contractor payments. 

In turn, s1308 CTA 09 also states that any amortisation shown in the accounts for these costs will not be an allowable deduction for corporation tax purposes.

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