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R&D - Capitalised Expenditure (FA 2004 s53)

Does a revenue deduction have to be claimed under s53 in order to claim R&D on the expenditure?

I’m working on a client who capitalises their R&D costs each year. The costs are then amortised over a period of time.

A 3rd party R&D specialist prepares their R&D claim, and a large portion of the costs in the claim, are costs that have been capitalised in the current year.

In the past when I have encountered this, I would claim a deduction for the current year development costs (which would be shown as additions in the accounts), under FA 2004 s53. This meant the costs were being taken as a revenue deduction in the year incurred, and therefore able to be included in the R&D claim. Amortisation of these costs would be disallowed.

Unfortunately, the last 2 returns for this particular client, this has not been followed. The current year additions have remained on the balance sheet, and the amortisation claimed instead. At the same time, they have been included in the R&D claim.

Having only ever used the s53 provisions in these cases in the past, I’m not 100% certain this is the correct treatment. My interpretation has been that in order for the expenditure to be included in the current year R&D claim, the cost would had to have been taken as a revenue deduction in the current year CT600.

That being said, I have had a look at CTA 2009 s1044(5), and it states “Condition D is that the company has qualifying Chapter 2 expenditure which is allowable as a deduction in calculating for corporation tax purposes the profits of the trade for the period.”

The legislation only gives the condition that the expenditure is allowable, (which it is ,it just hasn’t actually been deducted - although capitalised, it is revenue expenditure for tax purposes, and is genuine R&D expenditure), rather than saying it has been taken as a deduction in calculating profits of the trade.

It has certainly given me enough doubt to ask the question, so wondered what others on AWeb think. Does a s53 claim have to be made, and so a current year deduction claimed, in order for the current year capitalised development costs to be included in a current year R&D claim?

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20th Aug 2018 22:51

Surely the overriding principle is that profits are based on accounting under UK GAAP. If an expense is not allowed for in the P&L then it is not allowable for tax purposes regardless of whether it would otherwise be allowable, unless there is some overriding provision. I cannot see that anything makes an expense allowable for an enhanced R&D claim if no such expense has been accounted for under UK GAAP.

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By Duhamel
to Tim Vane
21st Aug 2018 09:06

Tim, you might like to review CIRD81450. My reading of it is that capitalised revenue expenditure does not prevent an R&D claim, although full relief may only be received for the revenue element when a deduction is claimed for the depreciation allocated to it.

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21st Aug 2018 15:28

Bumpity bump

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By Dib
21st Aug 2018 16:14

As you mention, s53 allows capitalised revenue expenditure to be treated for the purposes of an R&D claim as if it had not been capitalised. The provision is a relieving provision for those companies which had to adopt IAS38. IAS38 requires companies to treat some development expenditure as an intangible asset rather than an expense. Other companies which for some reason also capitalised R&D revenue expenditure could of course also claim the expenditure as revenue for the purposes of their R&D enhanced expenditure claims.

s53 makes it clear that, if the company has adopted it so as to treat the capitalised expenditure as revenue for the R&D claim so that it can get an enhanced deduction for the expenditure, then it cannot also claim tax relief for the amortisation on the same expenditure.

Also makes it clear that is it only pukka revenue expenditure which the company has capitalised as an intangible that can be claimed.

I have frequently claimed relief for capitalised revenue expenditure but never made a formal claim that I was doing it under s53, I've just adjusted it through the tax comp.

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21st Aug 2018 16:18

My understanding is that if the expense is tax-deductible through the P&L it is tax-deductible and enhanceable for R&D purposes if capitalised.

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