Research and development costs

What it means

Research and development costs are spending on acquiring new knowledge and applying it to create new or improved products, processes or software. Research aims at new knowledge, development at its practical use, such as a prototype, a pilot line or a new application.

They include salaries of researchers and developers, materials for experiments, depreciation of laboratory equipment, services of external research bodies, licences and certification of prototypes. What matters is that the work has an uncertain outcome and produces something new, not routine operations or minor adjustments.

The state supports R&D both through tax and directly. The R&D super-deduction allows part of these costs to be deducted from the tax base a second time, the patent box favours income from own patents and software, and grants from EU funds and national programmes are also available.

How it works in practice

In the accounts, research costs are generally expensed as incurred. Development results may under certain conditions be recognised as intangible fixed assets, especially when intended for sale or repeated use, and then amortised. IFRS works similarly, requiring evidence of future benefit for development.

If a company develops something in-house, costs can be capitalised, transferred to assets through income from capitalisation of own work. This requires project-based cost tracking: developers' hours, materials and services, so that it is clear what belongs to the asset.

For the super-deduction, the key is a written project prepared before work begins, with objectives, timeline and cost estimate, plus records of actual expenditure. Without proper documentation the tax authority will not accept the deduction, even if the research really took place.

What to watch out for

The line between development and ordinary activity is a frequent point of dispute in audits. Modifying existing software for a customer, routine testing or customer-specific configuration are usually not R&D. The project should clearly describe the technical uncertainties it addresses.

The same expenditure cannot be used twice for different incentives without checking the rules. If development was funded by a grant, the super-deduction generally does not apply to the subsidised part. When combining instruments, clear records of funding sources for each project are essential.