How intangible assets affect R&D tax credit claims

Understanding the link between R&D tax relief and intangible assets

The UK’s R&D tax relief scheme rewards innovation by offering tax incentives to companies undertaking qualifying research and development. From April 2024, a single merged scheme now applies to most businesses, with an enhanced relief available for R&D-intensive SMEs under the ERIS regime.

R&D relief is based on revenue expenditure – operational costs that are deducted from your profit-and-loss (P&L) account when calculating your Corporation Tax liability. Commonly included costs are staffing, materials, software and outsourced R&D activity. However, things can become more nuanced when your business capitalises these costs as intangible fixed assets.

Revenue vs capital expenditure – and why it matters

For a cost to qualify for R&D tax relief, it must be:

• Revenue in nature (not capital),
• Directly connected to qualifying R&D activity,
• Deductible in calculating your trading profits.

This means that capital expenditure (e.g. property, plant, or machinery) listed on your balance sheet will not normally qualify. However, many companies – especially in software development – choose to capitalise revenue expenditure such as staff time or subcontracted development when it relates to building a product with a longer useful life.

Under IFRS, companies are required to capitalise certain development costs that meet the definition of intangible fixed assets. Meanwhile, companies using UK GAAP (FRS 102) can elect to expense or capitalise such costs.

The key point? If these capitalised costs are revenue in nature (e.g. staff costs, software licences, or subcontractor fees), they may still qualify for R&D tax relief — with some important conditions.

Section 1308 – allowing for tax adjustments on capitalised costs

To account for this, the government introduced Section 1308 of the Corporation Tax Act 2009, which allows companies to claim a deduction in their tax computation for costs that are:

• Capitalised in the accounts,
• Revenue in nature, and
• Relate to qualifying R&D activity.

This provision effectively allows companies to treat qualifying capitalised intangible costs as if they had been expensed in the P&L — but only for tax purposes. It’s important to note that this is a tax adjustment only; your financial accounts remain unchanged.

Key implications:

• The company receives an immediate deduction against trading profits in the year the cost is incurred.
• Over time, amortisation must be added back in your tax computation, to avoid double-dipping.
• This creates a timing benefit, bringing forward tax relief compared to the gradual amortisation method.

A practical example: capitalising software development

Imagine your business spends £10,000 on software development, delivered by an employee. You estimate the resulting platform will have a 5-year useful life, so you capitalise the cost as an intangible asset.

Two approaches:

Using Section 1308, the business can claim the full £10,000 as a tax deduction in Year 1, creating alignment with the expensed approach and maximising cashflow in the short term.

What this means for your R&D claim

If you're capitalising development costs, you should:

• Identify which capitalised costs relate to R&D activities.
• Ensure those costs are revenue in nature and directly linked to qualifying work.
• Make a Section 1308 adjustment to your tax computation to reflect the deductible amount.
• Keep detailed documentation to justify the inclusion of these costs — especially under increased HMRC scrutiny.

HMRC’s stance on capitalised R&D costs

HMRC has tightened its compliance efforts and now expects robust, contemporaneous evidence for all costs included in a claim — particularly when intangible assets are involved. Software development, in particular, is an area of close attention.

Claims that include capitalised costs without a clear link to qualifying R&D activity — or without the appropriate tax adjustment — are at high risk of enquiry.

Good practice includes:

• Maintaining detailed timesheets and cost allocation records,
• Clearly distinguishing between qualifying and non-qualifying elements,
• Providing project summaries that match HMRC’s R&D definition (science/technology advancement and uncertainty).

Key takeaway: don’t let capitalisation dilute your claim

Capitalising R&D-related spend can make good commercial sense. But without the proper tax adjustment, you could be missing out on relief, or worse — risking an inaccurate claim.

By understanding how to handle capitalised intangible assets and applying Section 1308 correctly, you can strengthen your claim, align with current legislation, and ensure your innovation is properly rewarded.

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