R&D Tax Relief vs Capitalisation in the UK

R&D tax relief vs capitalisation: the short answer

R&D tax relief is a UK corporation tax incentive on qualifying research and development spend. R&D capitalisation is an accounting treatment: it records development spend as an intangible asset on the balance sheet and spreads the cost over the asset's useful life. One answers a question for HMRC (does this spend qualify, and what is it worth?); the other answers a question for the auditor (is this spend an asset?). They look at the same costs, but they apply different tests, count different costs and run on different timetables.

The point most often missed is that the accounting choice does not change the tax claim. A UK company claims R&D tax relief on its qualifying expenditure whether that expenditure is expensed or capitalised in the accounts, and the relief is claimed on the spend in the period it is incurred, not on the amortisation that follows. Capitalising development costs neither increases nor reduces an R&D claim.

R&D tax relief vs capitalisation at a glance

Two tests for the same spend

The overlap between the two is real but partial. For tax purposes, HMRC starts from activities that fall to be accounted for as R&D under generally accepted accounting practice, then narrows them with the Department for Science, Innovation and Technology (DSIT) Guidelines: the project must seek an advance in overall knowledge or capability in a field of science or technology, through the resolution of scientific or technological uncertainty (CIRD81300). A project to build a commercial product is rarely all R&D for tax: market research, routine engineering and work that is only new to the company fall outside it.

For accounts, the question is different. Under IAS 38 and FRS 102 Section 18, research and development splits into a research phase, always expensed, and a development phase, capitalised once specific criteria are met. The accounting split is about the stage of the work and the evidence that an asset will result; the tax test is about the scientific or technological advance being sought. A cost can pass one test and fail the other.

Where the same costs land under each test

The bottom-left cell is the one finance teams tend to forget: most of a scale-up's R&D claim can sit inside a capitalised intangible asset, and it qualifies just the same.

R&D tax relief under the merged R&D scheme and ERIS

For accounting periods beginning on or after 1 April 2024, two schemes replace the old SME scheme and the old R&D expenditure credit (RDEC): the merged R&D expenditure credit and enhanced R&D intensive support (ERIS). The qualifying-expenditure rules for the two are identical; the calculations differ, and a company cannot claim under both for the same expenditure (GOV.UK, merged scheme guidance, updated 8 January 2026).

The merged R&D expenditure credit (RDEC)

The merged RDEC is 20% of qualifying expenditure for a trading company within the charge to corporation tax, of any size (CIRD115000). It is a taxable credit: the gross amount must be brought in as trading income for the period of the claim, either in the accounts or in the tax computation (CIRD112000). The credit then works through a set of payment steps. It first discharges the company's corporation tax for the period. A notional tax deduction then applies, at the 25% main rate for a company with profits chargeable at the main rate and at the 19% small profits rate otherwise. A PAYE cap of £20,000 plus 300% of the company's relevant PAYE and National Insurance liabilities limits what is paid out, and any excess carries forward. After further steps (tax for other periods, group surrender and other HMRC liabilities), what remains is payable to the company, subject to conditions including that it is a going concern (CIRD112100).

For a company paying the main rate, the net benefit is therefore 20% less 25% tax on the credit: 15% of qualifying expenditure. For a company whose profits are taxed at the 19% small profits rate, it is 16.2%; in the marginal relief band it is a little lower.

Enhanced R&D intensive support (ERIS)

ERIS continues the old SME scheme in a narrower form. It is available only to an SME that is loss-making for tax purposes before the extra deduction and that meets the R&D intensity condition. Such a company deducts an extra 86% of its qualifying costs, a total deduction of 186%, and can surrender the resulting loss for a payable credit of 14.5%, which is not taxable. The surrenderable loss is the lower of 186% of the qualifying expenditure and the loss that has not been relieved in other ways (CIRD122000). Where the whole enhanced amount can be surrendered, the credit is worth 186% × 14.5%, about 27% of qualifying expenditure.

The intensity condition is met when relevant R&D expenditure is at least 30% of total relevant expenditure, counting connected companies worldwide. The 30% threshold applies to accounting periods beginning on or after 1 April 2024. For periods that end on or after 1 April 2023 and begin before 1 April 2024, the old SME scheme's enhanced rate of 14.5% applied at 40% intensity, and a company that met the condition and claimed in its last 12-month period can still qualify for one year after falling below it (CIRD123000). Profit-making SMEs, and SMEs below the threshold, claim the merged RDEC instead.

Merged RDEC vs ERIS

Claim notification and the additional information form

Two filing rules make a claim invalid if missed. A company claiming for the first time, or that has not claimed in the previous three years, must submit a claim notification within six months of the end of its period of account. Every claim made on or after 8 August 2023 needs an additional information form submitted on or before the date of the claim, describing the projects and the costs (CIRD182000). The claim itself goes in the company tax return or an amended return, generally within two years of the end of the period. None of these rules depends on how the costs are treated in the accounts.

R&D capitalisation under IAS 38 and FRS 102

The accounting side turns on the research and development phases. Research-phase costs are expensed as incurred under both frameworks. For development, the frameworks differ, and the difference matters to a UK company choosing or changing its accounts basis:

IAS 38 paragraph 57 says an intangible asset arising from development "shall" be recognised if, and only if, the company can demonstrate all six criteria; HMRC's own manual notes that, unlike FRS 102, IAS 38 does not permit development expenditure that meets the criteria to be expensed (CIRD99200). FRS 102 Section 18 "permits, but does not require" it (CIRD99150). The six criteria, the evidence auditors expect for each and a worked example are in our guide to R&D capitalisation under IFRS (IAS 38); the framework differences are set out in IAS 38 vs FRS 102 Section 18.

How R&D tax relief and capitalisation interact

Five rules, each from HMRC's own guidance, describe how the two fit together.

Which costs count for each

How the RDEC appears in the accounts

The tax rule is narrow: the gross merged RDEC must be brought in as trading income for the period of the claim, in the accounts or in the tax computation (CTA 2009 s1042H; CIRD181000). In practice, companies commonly present the RDEC above the line, as other operating income or as a reduction of R&D cost, applying grant accounting under IAS 20 or FRS 102 Section 24. Where the related costs have been capitalised, the frameworks differ. IAS 20 lets a grant relating to an asset be deducted from the asset's carrying amount or shown as deferred income. Under the FRS 102 Section 24 accrual model it is shown as deferred income and released over the asset's life; it is not netted against the asset. The policy is one to agree with your auditor. That choice changes when the credit reaches profit in the accounts; it does not change the amount HMRC pays or the period in which the credit is taxed. ERIS works differently: its extra deduction sits in the tax computation, and the payable credit is usually shown in the tax line.

Worked example: one project, two accounting policies

The figures below are illustrative. Lumen Forecasting Ltd is a fictional UK software company with a 31 December year end that reports under FRS 102. In 2026 it builds a machine-learning forecasting product, with total project spend of £1,000,000. The research phase runs from January to March; the development criteria are met from 1 April 2026, and the company has chosen the FRS 102 policy of capitalising development costs. The product is available for use from 1 January 2027, with a useful life of five years. The accounting period begins after 1 April 2024, so the merged scheme applies.

Lumen Forecasting Ltd: 2026 project costs

Lumen is profitable and pays the 25% main rate. Its gross RDEC is 20% × £725,000 = £145,000. Taxed as trading income at 25% (£36,250), the net benefit is £108,750: 15% of qualifying expenditure, or about 10.9% of the total project spend. The example assumes Lumen chooses to deduct the £640,000 of capitalised spend in 2026 under section 1308 (it is not required to), so the company deducts the full £1,000,000 in 2026, exactly as it would had it expensed everything. From 2027 the accounts charge amortisation of £128,000 a year (£640,000 over five years), which is added back in each year's tax computation.

Same spend, two accounting policies

Patent Box: profits, not costs

R&D relief and capitalisation both deal with the cost of creating technology. The Patent Box deals with the profit it later earns: a company with qualifying patents can elect to have a share of the profits from them taxed at a lower effective rate, subject to rules that link the relief to the company's own R&D. The three operate on different figures: R&D relief on the qualifying spend, the capitalised asset on the accounting cost, and the Patent Box on the profit stream. A company can use all three on the same technology, but the evidence each needs is different. A project log that ties R&D spend to the patents and products it produced serves all three.

What diligence teams check

At a Series A or later round, and in any sale, investors and their advisers read the accounts and the R&D claims side by side. The questions are predictable:

• Consistency. Do the projects in the claims match the capitalised projects and the product roadmap? A project described to HMRC as resolving technological uncertainty, and to the auditor as development with technical feasibility established, needs a coherent story across both.
• Capitalisation policy. When did capitalisation start for each project, on what evidence, and has the policy been applied consistently? Our IAS 38 capitalisation policy template sets out what a written policy contains.
• Claim history and enquiries. Were claim notifications and additional information forms filed on time? Are there open HMRC enquiries, and does the cash forecast rely on credits not yet received?
• What the asset is worth. The carrying amount of capitalised development is a cost figure, less amortisation. It says nothing about what the technology is worth to a buyer, which is a valuation question.

Our guide to auditing intangible assets in M&A covers the wider diligence checklist, and R&D expenses as hidden intangible value explains why expensed R&D often understates what a business has built.

FAQ

Can you claim R&D tax relief on capitalised development costs?

Yes. Qualifying R&D expenditure counts whether it is expensed or capitalised in the accounts. For capitalised revenue spend, section 1308 of CTA 2009 allows the tax deduction when the spend is incurred, and the merged RDEC or ERIS is claimed on the same qualifying expenditure in that period. The accounting treatment does not decide eligibility (HMRC CIRD81450 and CIRD81700).

Does capitalising R&D increase or reduce an R&D tax credit claim?

Neither. The claim is built from the qualifying cost categories, not from the accounts. Capitalising moves cost from the profit and loss account to the balance sheet; the qualifying expenditure, the credit and the period for which it is claimed stay the same. For ERIS, where the capitalised spend is deducted under section 1308, the loss test and the intensity ratio are also unaffected.

Is R&D tax relief given on amortisation?

No. The R&D credit is claimed on the expenditure in the period it is incurred. Where a company has also deducted the capitalised spend when incurred under section 1308 (which it can, but need not, do), the later amortisation is added back in the tax computation, because section 1308 prevents a second deduction for the same expenditure.

What is the merged R&D scheme?

The merged R&D scheme is the UK R&D expenditure credit that applies to accounting periods beginning on or after 1 April 2024. It replaced the old SME scheme and RDEC with a single 20% credit for companies of any size, taxable as trading income. Loss-making SMEs whose R&D is at least 30% of their total expenditure can claim enhanced R&D intensive support (ERIS) instead.

How is the R&D expenditure credit shown in the accounts?

HMRC requires the gross RDEC to be brought in as trading income for the period of the claim, in the accounts or in the tax computation. Companies commonly present it above the line, as other operating income or as a reduction of R&D cost, applying grant accounting. Where the related costs are capitalised, IAS 20 allows the credit to be deducted from the asset or held as deferred income; FRS 102's accrual model holds it as deferred income, not netted against the asset. Agree the policy with your auditor.

Do UK companies have to capitalise development costs?

It depends on the framework. Under IAS 38 (UK-adopted IFRS), development costs must be capitalised once all six criteria are met. Under FRS 102 Section 18, capitalisation is a policy choice applied consistently. Under FRS 105, R&D cannot be capitalised. The choice affects the accounts, not the R&D claim.

Next step: evidence the asset behind the spend

R&D tax relief recovers part of the cost of building technology, and capitalisation records that cost in the accounts. Neither tells a board, an investor or an acquirer what the technology is worth. Opagio does not prepare R&D tax claims and does not give tax advice; your R&D adviser and auditor own those. What Opagio for companies provides is the Opagio Value Drivers Register™, which records the intangible assets your R&D has produced, with the evidence behind each, and the Asset Valuator in Opagio Intangibles, which values them with recognised methods. For the tax side, the FAQs on how UK startups claim R&D tax relief and how R&D tax credits relate to intangible asset development cover the basics; for the balance sheet, see whether intangible assets can be capitalised.

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