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Intangible assets count as revenue expenditure when it comes to your Corporation Tax return. In order to work out how intangible assets affect any subsequent R&D Tax Credit claim, it’s important to understand specifically what they are and how they’re defined.
The R&D Tax Credits scheme is a vital source of funding for companies up and down the UK that have engaged in research and development activities. It acts as an incentive for businesses to grown and make scientific and/or technological progress in their field.
With claims being worth as much as 33 pence in every pound spent on R&D, the relief can add up to thousands. Offered by HMRC either as a reduction in Corporation Tax or as a cash lump sum, it’s open to any UK company and covers a massive range of R&D costs. Although claiming can be very worthwhile, the application process itself is complex, and you need to fully understand elements like intangible assets (and much more) in order to claim successfully. However, as R&D tax relief experts this is where we can help - more on that later.
An intangible asset is something that belongs to your company but which has no physical form. Items like buildings, vehicles, tools and stock do have a physical form, therefore they are assets but not intangible ones. Essentially, it’s pretty easy to decide if an asset is tangible simply by whether you can touch it or not.
Relevant examples of intangible assets include the company’s reputation, its customer relationships, licensing, copyright and franchising rights, trade secrets or formulas and intellectual property.
This is the tricky part. Because intangible assets aren’t something you can touch and hold, they’re very difficult to quantify and measure. Just because they’re intangible though, doesn’t make them worthless - far from it. They often add huge commercial value to your business providing an extra competitive edge, and are incredibly difficult to replace if lost.
Generally speaking, companies should only include intangible assets on their balance sheets which can be assigned a specific monetary value. They also should be items that have been acquired for a price, and which have a useful life span. Conversely, internally developed assets often don't give rise to reportable costs, meaning they shouldn’t be included on the balance sheet. That said, a software platform for instance is still classed as an intangible asset as it has a value but not a physical form.
When it comes to making an R&D tax relief claim however, management and reporting of all assets is vital. So although some assets may not appear on a company’s balance sheet, it’s still highly worthwhile investing in an effective resource management system.
Another important thing to understand at this point is the difference between ‘expensing’ a cost and capitalising it.
In essence, an expensed cost is one which is recognised on the company’s income statement and subtracted from revenue to give a figure for profit. Capitalising however is where the cost is accounted for as an asset on the balance sheet. It then becomes an amortisation expense on the company’s income statement.
Amortisation happens when a (typically intangible) asset depreciates over a set amount of time. This time span is usually equal to the amount of useful life that an asset would be expected to have. Note as well that amortisation - unlike depreciation - is generally tax deductible. This means that tax relief in respect of expenditure on intangible assets is provided across however many years the asset has benefited the business.
It is important to know here that the tax treatment of intangibles differs depends on the type of asset, for example patents, trademarks and licenses. Accounting standards set out criteria for when this type of expenditure ‘could’ and ‘should’ be capitalised. Under the old UK GAAP, there existed a fair amount of flexibility in comparison to international standards (IFRS) or FRS102. Where UK GAAP has defined particular costs ‘may’ be capitalised, IFRS and FRS102 stipulate that it ‘should’ be. This has led to companies having to consider the capitalisation of costs that they would have classed as expenses previously, due to the fact that they are moving from UK GAAP to FRS102.
As we have highlighted, correctly identifying and categorising R&D costs in accounting terms can be extremely tricky. It requires a large amount of technical knowledge and the ability to forensically examine expenditure in order to claim correctly. Not only that, but even if you do succeed in accounting for everything as you should, how do you know your claim is maximised? It’s very easy to miss a piece of expenditure off your claim, or wrongly believe it can’t be included. This could mean your company misses out on money it’s rightfully owed, which could amount to thousands. This is why specialist help and advice is vital.
Myriad Associates offers the highest standards of advice in all aspect of R&D tax relief and we put customer service at the heart of everything we do. Consisting of an expert team of R&D tax specialists, accountants and advisors, we have over 20 years of experience and can guide you through your claim from start to finish. We only deal in R&D tax relief and no other areas of accountancy at all, meaning our knowledge and professionalism is second to none.
We remove the guess work from R&D Tax Credits by taking a rigorous and robust approach to all claims, and boast a 100% success rate. Our technical knowledge is constantly being updated and we are able to tease out eligible R&D expenditure you may well have overlooked.
If you’re ready to begin your R&D Tax Credit claim, or if you have any questions about anything mentioned in this article, please do call us on 0207 118 6045. Alternatively, fill in our contact page and one of our team will get back to you.