We Capitalised R&D Costs Before April 2024: How Does ERIS Treat Them Now?

The R&D tax credit scheme has moved away from additional deductions to expenditure credits, changing how companies claim the credit and what rate they can use. The only exception is for the Enhanced R&D-Intensive Support (ERIS) scheme, which continues to use an additional deduction to support loss-making companies.

That raises an awkward question for anyone claiming amortised R&D costs from before April 2024: which scheme applies when the deduction for that spend finally lands in a later period, one that falls under the reformed R&D tax credit rules?

HMRC's guidance on out-of-period spend answers this directly. Here's how it works.

How can you capitalise costs for R&D tax credits?

Companies may be capitalising development costs (such as building a software platform, or another large development cost) rather than expensing them in the year they're incurred. Capitalised costs sit on the balance sheet as an intangible asset and are charged to the income statement gradually, through amortisation, over their useful life. This represents the usefulness of this project more realistically in the balance sheet.

Normally, only the amortisation charged in a given year is tax deductible, so only that portion would qualify for your claim each year. However, section 1308 of the Corporation Tax Act 2009 changes this: if the expenditure genuinely qualifies as R&D and isn't capital in nature, you can claim the full capitalised amount in year one instead of waiting for it to filter through as amortisation. This would be the same total benefit, just accessed earlier.

Unfortunately, this only applies to intangible assets; tangible fixed assets (plant & machinery, buildings…) do not qualify for R&D tax credits at all.

For the full breakdown, see our complete guide: Intangible Assets and R&D Tax Credits: A Full Guide

What Counts as "Out-of-Period" Spend?

Out-of-period spend is R&D expenditure that was incurred in one accounting period but only gets its Corporation Tax deduction in a later one. This happens when R&D costs are capitalised as an intangible fixed asset and amortised over several years rather than expensed in full in the year the work was done. This is relatively rare, as most companies choose to access their full credit via a section 1308 declaration.

However, a company claiming amortised costs annually will find that a single piece of R&D spend from 2022 might still be generating tax deductions in 2025, one small tranche at a time.

Out-of-period spend is only relevant to companies claiming intangible assets through annual amortised costs, and not to any company who claims their intangible assets in year one with a section 1308 election, nor to a company without R&D tax expenditure in intangible assets.

Which Rules Apply: When You Spent the Money, or When You Claim?

HMRC's position is that qualifying R&D expenditure is eligible for relief in the accounting period in which it receives its tax deduction, even if the underlying cost was incurred years earlier. What matters is whether the expenditure still meets the qualifying rules as they stand in the period you're claiming, not the rules that applied when you first spent the money. However, the rates that apply come from when the expenditure was incurred, not from when it is claimed.

In practice, this means capitalised R&D costs from before 1 April 2024 don't get frozen under the old SME scheme. If the deduction for that spend falls in an accounting period beginning on or after 1 April 2024, and your company is eligible, it can be claimed under the new Merged Scheme rules or the Enhanced R&D Intensive Support (ERIS) scheme.

The Merged Scheme changed the way the vast majority of companies claim R&D tax credits by switching from an additional deduction to an above-the-line expenditure credit. That means the amortised spend will simply be included in the expenditure credit at the prevailing rate (currently 20%).

However, loss-making R&D-intensive SMEs can still claim an additional deduction-based credit through ERIS. There are two parts to this; an additional deduction claimed on your profit-and-loss and a credit rate for surrendering the loss in return for cash.

How the Rates Are Set

The rate of additional deduction you apply depends on when the expenditure was originally incurred, not when you're claiming it:

• 130% for expenditure incurred before 1 April 2023
• 86% for expenditure incurred on or after 1 April 2023

If you're amortising a cost from January 2023, you still use the 130% rate for that portion, even though you're claiming under ERIS two or three years later.

The credit rate works differently. For any ERIS claim made in an accounting period beginning on or after 1 April 2024, the payable tax credit rate is a flat 14.5%, regardless of when the underlying expenditure was incurred.

You can find more information about calculating your claim with our guide: How to Calculate R&D Tax Credits: A Step-by-Step Guide

Example: Capitalised R&D Spend Meets ERIS

Company A capitalised £60,000 of R&D staffing costs incurred on 1 April 2022 and amortises this over three years on a straight-line basis, so £20,000 receives a tax deduction each year. By the accounting period ending 31 March 2025, the company's first period under ERIS, the final £20,000 tranche gets its deduction. Company A meets the R&D intensity and loss-making conditions for that period.

Because the expenditure was incurred before 1 April 2023, Company A applies the 130% rate: an additional deduction of £26,000. Its enhanced expenditure for this tranche is 230% of £20,000, or £46,000. Assuming the company has enough unrelieved trading loss to cover it, it surrenders the full £46,000 for a payable tax credit at 14.5%, worth £6,670.

What If One Period Mixes Pre- and Post-ERIS Expenditure?

Many companies won't have a single, tidy tranche like the example above. If an accounting period includes both older capitalised spend (at 130%) and newer spend (at 86%), you need to apply each rate to the right portion of the expenditure and then apportion your unrelieved loss between them on a reasonable basis, usually in proportion to the additional deduction each portion generates.

This is where the calculation gets genuinely fiddly, and it's an easy place to get wrong. If your R&D spend spans the 1 April 2023 and 1 April 2024 rate changes in the same claim, it pays to look closely.

Example: A Mixed-Rate ERIS Claim in Three Tranches

Consider a loss-making, R&D-intensive SME with a 31 March year end, now filing its first ERIS claim for the accounting period ended 31 March 2025 (which is its first period beginning on or after 1 April 2024):

• Tranche 1 – pre-1 April 2023, amortised. £90,000 of staffing costs incurred on 1 January 2022, capitalised as an intangible fixed asset and amortised straight-line over three years (£30,000 a year). The final £30,000 tranche is deducted in this period. As it was incurred before 1 April 2023, it attracts the 130% additional deduction rate.
• Tranche 2 – post-1 April 2023, amortised. £45,000 of software development costs incurred on 1 June 2023, also capitalised and amortised over three years (£15,000 a year). The tranche deducted this period was incurred after 1 April 2023, so it attracts the 86% additional deduction rate.
• Tranche 3 – post-1 April 2023, current-year revenue spend. £120,000 of staffing costs incurred and expensed directly within the period. As post-1 April 2023 expenditure, this also attracts the 86% additional deduction rate.

The company's tax-adjusted trading loss before any additional deduction is £25,000. It meets the R&D intensity and loss-making conditions for ERIS in this period.

Because Tranches 2 and 3 share the same post-1 April 2023 rates, they are grouped together. The calculation runs as follows:

 A single accounting period's trading loss cannot be time-apportioned by financial year once expenditure spans a rate-change date. Instead, HMRC accepts a reasonable basis of apportionment: splitting the total unrelieved loss between rate bands in proportion to the additional deduction each band generated.

Here, that gives 25.15% (£39,000 / £155,100) to the pre-1 April 2023 band and 74.85% (£116,100 / £155,100) to the post-1 April 2023 band. In each band the company surrenders the lower of its apportioned loss and that band's EE cap. Both apportioned amounts sit below the relevant cap here, so the full apportioned loss is surrendered in each band.

Because this is an ERIS claim, the same flat 14.5% credit rate applies to both bands regardless of when the expenditure was incurred; only the AD and EE rates vary by incurred date. The total payable tax credit is £6,566.47 + £19,548.03 = £26,114.50, an effective rate of 15.83% on the £165,000 of qualifying expenditure actually deducted this period.

What Should You Check Before You Claim?

• Identify any capitalised R&D costs still being amortised. Check your intangible asset register for anything originated before April 2024.
• Confirm the original incurred date for each tranche. This sets which additional deduction rate applies and defines your enhanced expenditure.
• Check you still qualify under the current rules. Eligibility is assessed against the qualifying criteria in place for the period you're claiming, not the period you spent the money.
• Confirm ERIS eligibility for the claim period itself. You'll need to be loss-making and meet the R&D intensity threshold in that specific accounting period, otherwise you’re under the Merged Scheme.
• Flag any period that mixes rates. If pre- and post-1 April 2023 spend both receive deductions in the same period, the apportionment needs to be calculated carefully.

Key Takeaways

• Out-of-period spend isn't a problem. Capitalised R&D costs regularly receive deductions years after the work was done, and HMRC's rules account for this.
• The claim period governs the scheme, not the spend date. If your deduction lands in a period beginning on or after 1 April 2024, ERIS is the relevant scheme, provided you're eligible.
• The spend period governs the rate, not the spend date. The additional deduction rate depends on when the cost was incurred (130% or 86%); the ERIS credit rate is a flat 14.5% regardless.
• Mixed periods need careful apportionment. Don't assume a single rate applies across an entire claim if your capitalised costs span more than one rate-change date.

If you capitalise R&D spend and aren't sure how your amortised costs should be treated under ERIS, get in touch with the Tax Cloud team and we'll walk through your claim with you.