Budget 98 – Tax boost for innovation

The Treasury will consider changes to accounting standards and tax incentives to encourage innovation, according to a consultation paper published after last week’s Budget.

The document, ‘Innovating for the Future: Investing in R&D’, describes the tax and accounting for R&D costs and asks how they might be changed to promote innovation.

‘If the financial market is to have a thorough understanding and appreciation of spending on R&D and innovation, then companies will need to describe this expenditure clearly in their financial reports,’ the paper concludes.

The knowledge economy has presented problems for standards-setters over the past few years. The relevant UK standard, FRS10: ‘Goodwill and Intangibles’, published last autumn, side-stepped specific treatments for R&D costs.

Under FRS10, research is written off immediately against revenues while development costs can, in some circumstances, be capitalised and amortised over time.

The Treasury paper revives a proposal put forward last year by a Scots ICA working party on innovation which recommended capitalising R&D costs from the point at which the asset is recognised.

Arthur Andersen technical partner Isobel Sharp, who chaired the Scots ICA committee, said recognition would depend on evidence of a defined project for which expenditure is separately identifiable, and a reasonable certainty of technical and commercial viability.

‘Many companies have superb systems to manage their innovation pipelines,’ said Sharp. But if the costs are written off against revenue, as FRS10 allows, the annual accounts wouldn’t reflect the value of the created assets, she said.

Sharp added that the International Accounting Standards Committee is planning to include R&D in its exposure draft on intangibles, due next month. ‘If that exposure draft becomes a standard, it would be another impetus to the ASB to start work on R&D,’ she said.

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