Research and development tax credits are available if the company is engaged in research and development and the company makes a trading loss; either where there was a trading loss before the enhanced R&D expenditure at 230% was applied, or where a trade profit became a loss because of the R&D enhanced expenditure.
The tax credit available is 14.5% of the lower of the trading loss, or the enhanced R&D deduction
Claiming the tax credit means that the losses are ‘surrendered’ rather than carried forward to be offset against future profits of the same trade.
Are UK Research and Development costs expensed or capitalised?
Research and development costs are generally expensed in the year that they are incurred.
An argument can be made to capitalize development costs and carry them forward as an intangible asset, and amortize the cost over the periods when the company expects to benefit from them.
To capitalize development costs, the following criteria must be met:
- There is a clearly defined project
- Expenditure is separately identifiable
- The project is commercially viable
- The project is technically feasible
- The project income is expected to outweigh the cost
- Resources are available to complete the project
Even if these criteria are met, a company can still choose to expense the costs as they are incurred.
Are UK Research and Development costs deductible?
Yes, research and development costs are tax deductible, at 230% if HMRC’s R&D guidelines are met.
Are UK Research and Development costs fixed or variable?
The costs eligible for 230% tax deduction are:
- Wages costs of the people directly involved in R&D (gross wage + employers NI + employers pension contribution)
- Subcontractors costs if those subcontractors are working directly on the R&D project (65% of the costs are allowable)
- Staff costs where staff are provided by an agency (65% of relevant payments made to the external agency are allowable)
- Consumable costs directly involved in R&D (materials, light, heat – note that data & telecommunications costs are specifically excluded)
Specifically excluded costs are:
- the production and distribution of goods and services
- capital expenditure
- the cost of land
- the cost of patents and trademarks
- rent or rate
Author: Alex Koupland, Manager, Plus Accounting
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