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HMRC internal manual

Venture Capital Schemes Manual

Venture Capital Schemes: knowledge intensive companies: the relevant operating costs

The operating costs of a company are all those that appear in the profit and loss (P&L) account or income statement, including cost of sales, which are identifiable in the accounts or tax computation as being initially a relevant expense for the P&L account in accordance with generally accepted accounting practice.

However to achieve a fair view of the company’s operating costs:

  • capitalised revenue expenditure is included in operating costs
  • depreciation and amortisation must be excluded
  • exceptional items must be excluded.

The research and development costs or innovation costs are those costs that are directly attributable to the work carried out to create the relevant intellectual property, where the company meets the innovation condition. If the company does not meet the innovation condition but does meet the skilled workers condition the costs are those that are for the work carried out by the skilled employees and their assistants.

If a company prefers, it may use the qualifying expenditure for the research and development tax credits under Part 6A and Part 13 of the Corporation Tax Act 2009. The same approach must be taken when determining the operating costs for all companies in a group.