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HMRC internal manual

Corporate Intangibles Research and Development Manual

HM Revenue & Customs
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Core computational rules: deductible debits: relief for capitalised expenditure on an intangible asset: general

Accounting cost v tax cost

In order to calculate the deductible debits due under CTA09/PART8 for any period of account, in respect of capitalised expenditure on an intangible asset it is necessary to know the cost of the asset to be recognised under Part 8. This is a two-stage exercise.

It is necessary:

  • first to identify the ‘accounting cost’ of the asset,
  • then to make any necessary adjustments to that figure to arrive at its ‘tax cost’.

First stage

The first step is to identify the capitalised expenditure on the asset shown in the accounts (drawn up in accordance with GAAP). Subject to the point about fungible assets below, the ‘asset’ for the purposes of Part 8 will be the asset as recognised for accounting purposes.

There are two points to note here.

  1. The expenditure to be taken into account need not have been incurred on the acquisition of the asset. Expenditure for example on its creation or enhancement is also part of the asset’s accounting cost so long as it is capitalised in the accounts.
  2. But it is necessary to exclude any element of the value of the asset that does not represent expenditure. In particular, where (exceptionally) an asset appears in the balance sheet at a valuation that exceeds its original cost, that excess is not part of the accounting cost of the asset for the purpose of Part 8.

Second stage

The second step is to consider whether any tax adjustments need to be made to the accounting cost of the asset identified at the first stage. How adjustments are defined for the purposes of Part 8 is set out in CIRD12030.

Possible tax adjustments

  1. In practice the most common type of adjustment is likely to be where expenditure on the asset has been used to defer recognition of the gain on the disposal of another asset as a result of a reinvestment relief claim (see CIRD20010). In that case the tax cost of the asset is reduced by the amount of the gain deferred.
  2. Adjustments to the accounting cost of the asset may occasionally be necessary under one or other of the provisions listed in CIRD12580.
  3. See CIRD12725 for the treatment of grants netted off against the cost of an intangible asset in a company’s accounts.
  4. See CIRD12730 for the case where an intangible asset is acquired along with other assets, for example on the acquisition of a business.
  5. See CIRD12745 for cases, likely to be rare in practice, where an intangible asset previously outside Part 8 in the hands of a company comes within Part 8 in its hands for the first time.
  6. See CIRD13070 for cases where there is an adjustment on change of accountancy basis.

Fungible assets - CTA09/PART8/S858

The acquisition of a number of units of a fungible assets (such as milk quota) counts as the acquisition of a single asset and the acquisition of further units counts as expenditure on the enhancement of that asset rather than the acquisition of further separate assets. See CIRD11760 for the definition of a fungible asset and in particular the special way the FA02 rule applies to them.