CIRD99050 - R&D tax relief: accountancy: overview

Link with accountancy

FA04/S50 (previously FA98/S42) specifies that the starting point for calculating taxable profits is accounts drawn up in accordance with GAAP. GAAP is defined so as to include accounts drawn up in accordance with either UK GAAP or IAS. (IAS is included in this definition for accounting periods beginning on or after 1 January 2005.)

UK GAAP has a standard specifically relating to R&D called SSAP13 ( CIRD99100). International accounting for R&D is dealt with by IAS38 ( CIRD99200). For smaller entities the FRS for Smaller Entities will be in point. It is beyond the scope of this manual to advise on the detail of these standards, and if accountancy advice is required it should be sought from your local Revenue accountant. Inspectors will also find helpful material on the Inland Revenue Accountants’ intranet site.

It is not the accountancy treatment but the DTI guidelines that determine whether a project is R&D for tax purposes ( CIRD81300).

Introduction of IAS

It is a legal requirement that the consolidated accounts of listed companies are prepared in accordance with IAS for accounting periods beginning after 1 January 2005. There is an option for other accounts to be prepared on this basis also. Until the inclusion of IAS within the definition of GAAP, we followed the UK GAAP accounting treatment to decide when expenditure was deductible in calculating the taxable profit for the purposes of the R&D tax relief. So expenditure was treated as deductible in calculating the taxable profit when it was correctly charged to the profit and loss account in accordance with UK GAAP.

But IAS38 includes different rules for recognition of development expenditure on the balance sheet. Significant amounts of expenditure, which we would accept as revenue for tax purposes, might have to be taken to the balance sheet and be released over the period of expected economic benefits arising from the development.

In order to avoid the adoption of IAS resulting in a delaying of the availability of R&D tax relief we introduced special rules to allow R&D expenditure when it was incurred ( CIRD81450).