If you’re the kind of business that is on the cutting edge of new software creation, a pharmaceutical company or anything in between, you may be considering capitalising on development costs. But what would the R&D tax implications be if you chose to go down this route? This succinct rundown from Williamson and Croft will give you everything you need to confidently make your decision.
As expert tax accountants and specialists in the technology accountancy sector we regularly work with companies who are navigating tax implications, so are well-informed to give you our own professional advice and insight. Optimise your cash flow with Williamson and Croft today and read our news piece below to gain a better understanding of whether capitalising on R&D development costs is right for your company.
How can R&D costs be handled?
R&D, otherwise known as research and development, expenses refer to a company’s expenditure on the innovation of their products, services or processes. R&D tax relief is provided by the government to award companies that invest or work on innovation projects in the science and technology sector. When a company incurs R&D costs, it can handle the expenditure in two ways:
- Costs can be immediately expensed: In the Profit and Loss (P&L) statement, the R&D costs are recorded as expenses.
- Costs can be capitalised: Through amortisation, the expenses are spread across multiple years. On the balance sheet, costs are treated as assets.
So, what are the tax implications if R&D development costs are capitalised?
Depending on which option you choose, you will experience different tax implications that will impact your cash flow. If you expense the costs immediately, you may experience a benefit to your cash flow since you will receive 100% tax relief in the year when you incurred the costs. Meanwhile, if R&D development costs are capitalised, the tax relief is obtained bit-by-bit throughout the lifespan of the asset. If you choose this option, you will amortise expenses year by year.
The impact of R&D tax relief
R&D tax relief can still be claimed by businesses that capitalise on development costs, but this process can impact how R&D tax reliefs are claimed. A Section 1308 election is an essential option for businesses if they are looking to hasten tax relief on capitalised R&D costs. By enacting this election, your business can claim capital allowances, allowing full tax relief in the year the money was spent.
The takeaway for your business
No matter if you decide to capitalise on costs or not, there are positives and negatives. By capitalising costs, you can enjoy more consistent tax deductions as R&D tax relief is experienced through gradual amortisation, but this does mean that you may not experience an immediate tax benefit. Meanwhile, when you expense R&D costs, you can receive immediate tax relief for a healthier cash flow, yet doing so may mean you miss out on capital allowances further down the road.
Need some guidance?
Tax implications, specifically revolving around the capitalisation of R&D development costs, can be a complex financial field. If you’re looking for an expert accountancy firm to help guide you through this process, you’re in the right place. At Williamson and Croft, we can help your business gain a full understanding of capitalising R&D development costs, allowing you to optimise your operations and cash flow.
To get started, contact our specialists and allow our expert team to explain each step of the process before advising if it’s right for you.