February 13th, 2017 / Insight posted in The Sunday Times Business Doctor

Business Doctor: Can we claim tax relief on R&D?

AS writes: We recently developed some internal technology to enhance our customer offering. The total cost was £150,000. How should we account for this expense and is there any tax relief available?

Internally developed technology is becoming increasingly common as businesses move towards a more digital world, writes Jamie Sherman, partner at Kingston Smith LLP.

Companies tend to include any costs incurred as expenditure within their profit and loss account. However, capitalising the expenditure as an intangible asset on the balance sheet may be more beneficial to the company’s finances.

Expenditure can be capitalised only where technical feasibility and the ability to generate economic benefits can be demonstrated.

In your case, this means the company must be able to show how the technology will enhance the customer experience, or indicate if there is potential to sell the asset in the future.

If it is possible to show these benefits, the company could include any costs incurred in developing the asset on its balance sheet.

The asset should be written down over its useful economic life, which must be substantiated at the outset. The company can still “expense the costs” if it wishes to do so.

With regards to tax, where the expenditure is simply included in the profit and loss account, this would usually be an allowable deduction against trading profits. Where an intangible asset is created, the amortisation would normally be allowable for corporation tax purposes.

A further area to consider is research and development tax relief. Where the conditions of this relief are met, small and medium-sized businesses can claim an enhanced reduction in their taxable profits.

Where the company is loss-making, a cash payment can be claimed, which could provide a useful cashflow boost.