Know the Figures

R&D Capitalisation Tax Impact

When research must be amortised rather than deducted, the tax bill arrives early.

Replaces: Tax advisers’ modelling of the Section 174 change

How to use it

Where research and experimental spend must be capitalised and amortised rather than deducted when incurred, taxable profit rises sharply in the early years. Enter your spend, where it is performed, and the amortisation periods, and the schedule shows the tax that brings forward.

Where the number comes from

  • Each year of spend becomes a cohort amortised over its own period — one for domestic spend, a longer one for foreign.
  • A mid-year convention allows only half a year of amortisation on each cohort in its first year, which is what makes year one so severe.
  • The deduction available in any year is the sum of every cohort still amortising, so it climbs over time rather than arriving at once.
  • Extra tax is the difference between tax on profit after the allowed deduction and tax on profit had the spend been deductible in full.
  • Losses are carried rather than refunded, so no benefit is assumed in a year where taxable profit is negative.

What goes wrong

The part most calculators leave out.

  • Rules in this area have been unstable and are jurisdiction-specific. Amortisation periods, the availability of full expensing, and any transitional or retrospective relief all change — verify the current position rather than relying on the defaults here.
  • What counts as research or experimental expenditure is broader than most people expect and frequently includes software development that a business considers ordinary engineering.
  • This models the timing of deductions only. Research credits are a separate mechanism, interact with the deduction, and can substantially offset the effect.
  • Loss-making companies are treated as receiving no benefit, but real treatment depends on carry-forward rules, expiry and limitations that vary widely.
  • Where research is performed drives the answer as much as how much is spent, because foreign amortisation periods are typically far longer. Restructuring on that basis has consequences well beyond tax.
  • This is a timing model, not tax advice. Over the full amortisation period the total deduction is unchanged; the cost is the cash given up in the meantime, and how much depends on facts a specialist must establish.

The tax bill on money you already spent

A company spends 3m a year on R&D, 75% of it domestic, against 3.4m of profit before the deduction. Under full expensing, taxable profit would be 400,000. Under capitalisation with a five-year domestic period, a fifteen-year foreign period and a half-year convention in year one, only about 250,000 is deductible — so taxable profit is roughly 3.15m. At 21% that is over 570,000 of additional tax, payable on money that has already left the business as salaries. The deduction is not lost; it arrives across the following years. But the cash gap lands immediately, and it lands on exactly the companies that spend most on research.

Questions

Is the deduction lost?
No — it is deferred. Over the full amortisation period the total deduction equals the total spend. What is lost is the use of the cash in the meantime, which for a business funding research from operations can be severe.
Why is foreign R&D treated so much worse?
Because the amortisation period is typically much longer, often three times the domestic one. The same spend therefore produces a far smaller annual deduction, which is a deliberate policy choice to favour domestic research.
Does this interact with research credits?
Yes, and materially. Credits are a separate mechanism that can offset much of the effect, and in some regimes the deduction must be reduced by the credit claimed. Model both together with an adviser rather than either alone.
Does anything I type get sent anywhere?
No. The whole calculation runs in your browser. Nothing is transmitted, stored, or logged, and there is no account to create.

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