WHAT ARE CAPITALISED EXPENDITURE & HOW WORKS WITH R&D CLAIMS?
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R&D Tax Credits and R&D Tax Relief are a reward for the companies contributing in the fields of science and technology by bringing innovation to the fields. The UK government provides the eligible company with payable credits or tax relief against their eligible expenditure, therefore eligible expenditure needs to be calculated meticulously so that you don’t leave out any eligible cost.
HMRC has given detailed guidelines regarding the eligibility of R&D tax credit claims, but still, R&D claims can be a little tricky to deal with. This blog will explain capitalised expenditure and its relation to R&D tax credit claims.
WHAT IS CAPITALISED EXPENDITURE?
Capitalised expenditure costs are amortised or depreciated on the balance sheet to represent how that has been beneficial for your business. Instead of writing an asset as one large expenditure in the year of purchase, the account statement will reflect depreciation in each accounting period in which the asset was useful. In this way, the annual profit will be an accurate representation of its financial condition.
CAPTALISED EXPENDITURE AND R&D CLAIMS
CIRD manual sets out eligibility criteria for R&D claims given by HMRC. According to CIRD81700 qualifying criteria for R&D expenditure is that expenditure should be allowable as deduction while calculating the profits of the trade. This criterion excludes capital expenditure from the equation of R&D claim, however, that’s not the case, because later CIRD81700 states that on the basis of accounts treatment either including an asset on the balance sheet or depreciate cost directly to the profit and loss account it cannot be deduced whether the expenditure is revenue or it is treated as capital expenditure for tax purposes.”
According to CIRD81450, capitalised expenditure is considered as qualifying expenditure for R&D claim, only if it fulfills the following three prerequistes:
- The expenditure must be considered as an intangible asset, not as a tangible asset in the accounts.
- It should also be an allowable expenditure for the calculation of taxable profit for the period under review.
- The capitalised expenditure must have been incurred in the period under review.
Any capital expenditure meeting the above-mentioned criteria can be considered as eligible expenditure for R&D tax credit or R&D tax relief claim. It is important to note that if the eligible expenditure is given full R&D tax relief in the year it is incurred then subsequent amortising of the asset within the account must not be considered for the R&D tax relief claim later. Complying to this ruling ensures that you get your R&D tax credits in a whole and hassle-free manner. It also aids you in obtaining maximum R&D tax relief.
INCLUSION OF CAPITALISED COSTS IN YOUR R&D TAX CREDIT CLAIM
In the R&D tax credits claim, capitalised costs are included in a specific manner. This involves capitalising certain costs prior, and then adding them as part of the R&D tax credit claim. Below are some common costs that are capitalised, as an intangible fixed asset, to fit into the R&D tax relief claim:
- Costs that are capitalised for the employment of staff pertaining to a particular R&D project
- Some costs for software that occurred pertaining to an acceptable R&D project and are capitalised
- Some costs for the subcontractors that were carried out pertaining to an acceptable R&D project and were capitalised
These are the costs which are commonly capitalised in an R&D tax credits claim.
‘INTANGIBLE ASSETS’ AND THEIR RELATION WITH R&D TAX CREDIT CLAIMS
To describe an intangible asset in simpleton terms would be as follows:
An intangible asset is a property of a company or conglomerate that has no physical, or tangible form. In contrast, tangible assets would be the company’s material holding with the likes of a building structure, land, tools, transport vehicle, and stocks as well. They do exist as elements that are essential properties for a company, however, since they can be deal with physically, they do not qualify as intangible.
Simply stated, intangible assets are assets that cannot be touched physically. Common examples are intellectual property such as ideas and strategies, a company’s reputation, rights to copyright and franchising, license agreements and development secrets, etc.
R&D Tax Credits claim for capitalised expenditure might seem confusing but our R&D tax credits team can solve this puzzle for you. You can contact our R&D tax Relief specialists and they will aid you in assessing eligible costs for an R&D claim. Our R&D tax credit specialists will help you identify hidden eligible costs, will find the perfect scheme for you and will submit the claim on your behalf so you don’t have to worry about the process. Furthermore, our R&D tax credits team specializes in covering all eligible costs for your R&D tax relief claim, with each professional expertly highlighting any opportunity through which you can be reimbursed with your R&D tax credits to the maximum.