Specialist R&D Tax & Grant Funding Advisors

R&D Tax Credits | Software | Incorrect Accounting Policies

Barrie Dowsett

Chief Executive Officer



The Problem

Software developers losing out on £000′s of R&D tax credits due to bad accounting.

I am staggered by the number of software companies that I meet who are unable to claim R&D tax credits because of incorrect accounting. This is a real shame as R&D tax credits are the prime government-backed incentive to encourage investment in research and development.

The biggest and most fundamental error that I have come across is that businesses capitalise costs associated with developing software for sale as a FIXED ASSET.

Not only is this accounting treatment incorrect, it also means that you pretty much give up your 25% R&D tax funding entitlement.

This is because under the R&D tax relief scheme you can only claim ‘revenue expenditure’ and not ‘capital expenditure’.

The Answer

So what is the correct accounting treatment?

The answer to this question can be found in accounting standards SSAP13 and IAS38. To save you the trouble of having to read and interpret these standards, I provide the following high level summary:

SSAP 13 – Accounting for research and development

  • Pure and applied research should be written off as an expense in the year of expenditure;
  • Development expenditure should also be written off in the year of expenditure. However in certain strictly defined circumstances it is permissible to defer development expenditure to the extent that its recovery can reasonably regarded as assured. Such deferred development costs must be amortised in future years

IAS 38 – Intangible Assets

  • Research phase – recognised as an expense when incurred
  • Development phase – recognised as an expense when incurred unless certain criteria are met then the costs should be capitalised in the balance sheet as an Intangible Asset.

In conclusion, the correct accounting treatment is to expense R&D costs relating to the development of software that is intended for sale. It may be possible to capitalise these costs as an Intangible Asset providing the recovery can be reasonably assured. The good news is that eligible R&D costs capitalised as an Intangible Asset will most likely attract R&D tax relief.

The Solution

So what can I do if I have treated R&D costs relating to developing software as a Fixed Asset?

The first thing I would recommend is to obtain professional advice. It is important to ensure that you are made aware of the impact a material accounting policy change has upon the business. Myriad Associates has extensive experience in advising and dealing with such a change. We will guide you through the following process:

  • Development of an accounting policy in accordance with SSAP13 and IAS38;
  • Preparation of a full risk register and benefits schedule relating to the change in accounting policy. The benefits schedule will outline the R&D tax relief opportunity.
  • Detailed workings and a schedule of accounting entries to support the change in accounting treatment.
  • Advice and guidance on the requirement to file amended Statutory Accounts at Companies House.
  • Preparation of a maximized R&D tax relief claim.
  • Completion of Amended Company Tax Returns (CT600) and tax computations.