R&D super-deduction

What it means

The R&D super-deduction allows an extra slice of in-house research and development spending to be deducted from the tax base, on top of it already being an expense.

It is not only for laboratories. Software development, new processes, materials and substantially improved products qualify where the work is systematic with an uncertain outcome.

The super-deduction is neither a grant nor a refund. It reduces the base on which income tax is calculated, so its benefit shows only as lower tax in a profitable year. A company that needs cash for development now cannot treat it as a way to fund the project; it is a saving that arrives later.

How it works in practice

It requires a written project prepared before work starts, with objectives, a timetable and expected costs. It cannot be written up afterwards, and without it there is no entitlement.

Eligible costs include the wages of people on the project, depreciation of assets used and materials. So time has to be recorded separately, not estimated as a percentage at year end.

For clients developing software or new products, we set up the books so the project has its own cost centre or analytical accounts from the start. Wages, depreciation and materials are booked there as they arise, with a reference to the project, so at year end the deduction comes straight from the ledger rather than from estimates.

What to watch out for

The deduction can be claimed in a loss year and the unused part carried forward. But if the project does not meet the definition of research, an audit removes the whole claim, not part of it.

Expenses covered by a grant or other public funds do not qualify for the super-deduction. A company drawing a grant for the same project has to split its costs between the grant-funded part and the part paid from its own money. If it deducts everything, the audit strikes out the difference and the tax is paid with a penalty.