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 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
IAS 38 – Intangible Assets
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 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: