R&D Tax Credits - Capital vs Revenue

The rates for the three R&D Tax Credit Regimes
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  • R&D Tax Advisors are invited to find out more about the Inspired.tax claim preparation software.
  • Otherwise, please feel free to continue to browse this website for useful information regarding claiming R&D Tax Credits in the UK. However, beware that none of the information has been updated since 2018.
One of the hottest topics within R&D Tax Credits is whether project expenditure was capital or revenue in nature for tax purposes. This should not be confused with the accounting treatment of the expenditure, although this could be an indicating factor to the correct classification. This is particularly a concern for software development projects.

The Complexity

There is no hard and fast rule as to whether an R&D project is revenue or capital for tax purposes. Rather there are defining characteristics that can be used to characterise projects.

Typical Traits of Capital and Revenue Projects

Revenue Project

  • Ongoing development to improve existing technology
  • Regular releases into production
  • Mostly undertaken by internal staff
  • Cost expensed to the P&L
  • Small or ongoing project costs
  • No senior project signoff

Capital Project

  • An asset of enduring benefit
  • New/greenfield development
  • A limited number of deliveries
  • Largely undertaken by third parties
  • Costs capitalised as tangible fixed assets
  • Cost material to the business
  • Requires senior sign-off

R&D Tax Credits for Costs Expensed to the P&L

Typically, costs expensed to the P&L are revenue in nature (for tax purposes) and should be claimed under the SME or RDEC regimes (as applicable).
If the costs are actually capital in nature, then a review should be undertaken to ascertain why there were expensed rather than capitalised. No R&D claim will be possible under this eventuality.

R&D Tax Credits for Capitalised Projects

Projects that are capital in nature for tax purposes should be claimed as RDA (Research and Development Allowances).
However, projects that are revenue in nature for tax purposes can be elected into the RDEC or SME regimes.

The Eligibility Criteria

Whether the nature of a project for tax purposes is revenue or capital (and thus a claim is made under the SME, RDEC or RDA regime/s) the core eligibility criteria (as defined by the governments BEIS guidelines) remain the same. However, the tax legislation differs been the regimes. This includes whether subcontracted activities can be included in a claim and the proportion of EPW (Externally Provided Worker - individuals third-party contractor) costs that can be claimed for R&D tax credits.
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