Claiming R&D Tax Relief on Capital Expenditure

Claiming R&D Tax Relief on Capital Expenditure

Overview

Expenditure that has been capitalised, either as Tangible Fixed Assets, or Intangible Assets can be included within an R&D Claim, but it may have an impact upon which R&D regime you claim under.

Capital vs Revenue

The determination of whether a project is capital or revenue in nature (for tax purposes) is very important, as it impacts which relief (and subsequently what benefit) you receive.
A capital project will seek to develop an asset of enduring benefit and will likely be a new technology that has a large cost and long lifespan.
A revenue project will likely be an ongoing project seeking constant improvements, with regular releases. It is also more likely to have been undertaken by internal staff, rather than third parties and contractors.

Tangible Fixed Assets

We find that projects capitalised as tangible Fixed Assets are normally capital in nature for tax purposes. This, however, is not always the case and sometimes a project has more traits of a Revenue Project. In this case, it can be possible to claim RDEC (or SME relief) on the depreciation of the costs.
If the costs are indeed capital in nature for tax purposes, then the claim should be for RDA.

Intangible Assets

We find that projects capitalised as Intangibles, often fall into each camp. If the costs are capital in nature, then as per Tangible Fixed Assets, they would be claimed as RDA, however, if they are revenue in nature, then there is a specific R&D legislation (S1308) which states that the costs can be treated as if they had gone through the P&L. This means that the company will get an immediate year one deduction on the costs, in addition to the cash credit that an RDEC or SME claim brings.
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