If your company capitalises research and development spend as an intangible asset on the balance sheet, you could be quietly locking yourself out of valuable corporation tax relief. Section 1308 of the Corporation Tax Act 2009 is the provision that sets you free — but only if you actually make the adjustment in your tax computation.
In this guide we break down what a Section 1308 adjustment is, when it applies, how it interacts with R&D tax relief under the new merged scheme, and how to make the adjustment correctly (with a worked example). If you run an SME that capitalises software development or product R&D, this is one of the most commercially important corners of UK tax law you can get to grips with.
What is Section 1308 of the Corporation Tax Act 2009?
Under normal accounting rules, when R&D expenditure is capitalised as an intangible fixed asset, it sits on the balance sheet and is amortised to the profit and loss account over the asset’s useful life. Tax relief would typically follow the accounts — spread over several years.
Section 1308 CTA 2009 overrides that timing rule. It allows a company to deduct qualifying R&D expenditure in full, in the year it is incurred, even though the accounts have capitalised it. In HMRC’s own words in the CIRD manual, the provision permits expenditure to be deducted in computing profit when it is incurred, irrespective of whether it appears as a deduction in the profit and loss account.
The provision only applies where:
- The expenditure is on research and development
- The expenditure is revenue in nature, not capital (you cannot use Section 1308 to turn capital spend into revenue)
- The expenditure has been brought into account in determining the value of an intangible fixed asset (IFA)
- No deduction has already been taken in a previous accounting period
Crucially, Section 1308 does not apply to expenditure capitalised as a tangible fixed asset. For tangible R&D spend, you would instead look at Research and Development Allowances (RDAs) under the Capital Allowances Act 2001, which give a 100% first-year allowance.
Why Section 1308 matters: the commercial impact
Consider a simple contrast. A company spends £100,000 on qualifying software development. The developers are employees, their time is a revenue cost, but because the software will benefit the business for five years, accounting standards (FRS 102 section 18 or IAS 38) require the cost to be capitalised as an intangible asset and amortised over five years.
Without a Section 1308 adjustment, only £20,000 a year enters the tax computation — and only £20,000 a year is eligible for R&D tax relief. With a Section 1308 adjustment, the full £100,000 hits the tax computation in year one, and the full £100,000 is available to support an R&D claim in that year.
This is a timing difference, not a permanent saving, but the cash flow and relief impact for growing SMEs can be transformational — particularly loss-making start-ups that want to surrender losses for a payable credit now rather than five years from now.
When does Section 1308 apply in practice?
The shift from old UK GAAP to FRS 102 pushed far more companies into capitalising development costs. You are most likely to need a Section 1308 adjustment if:
- You are a software or SaaS business capitalising in-house development under FRS 102 s.18 or IAS 38
- You are building proprietary technology, platforms or engineering IP
- You have engaged subcontractors whose fees have been rolled into the cost of an intangible asset
- Your accountant has moved you from UK GAAP to FRS 102 and capitalisation has increased as a result
If any of these apply, the balance sheet line “intangible assets” or “development costs” is your red flag. Check the note in your accounts — if the additions in the year look suspiciously like R&D salaries and contractor fees, Section 1308 is probably in play.
Section 1308 and R&D tax relief: how they interact
For expenditure to qualify for R&D tax relief, it must be allowable as a deduction in computing the company’s trading profits for the period. That is where Section 1308 earns its keep. Without the provision, capitalised R&D is not deducted in the period incurred, and therefore cannot form the basis of an R&D claim in that period either.
Section 1308 unlocks the deduction, which in turn unlocks the R&D claim. HMRC confirms in CIRD81450 that no claim is required to use Section 1308 it operates automatically but in practice you must reflect it in the tax computation by adding back the capitalisation and deducting the qualifying spend instead.
Two important guardrails apply:
- No double deduction. Section 1308(6) blocks relief if a deduction has already been taken in a prior period or if the company has already benefited from R&D relief on that expenditure.
- No amortisation deduction later. Section 1308(5) prevents a deduction for the amortisation of any asset value attributable to the expenditure that has already been deducted under Section 1308. If you take the full hit in year one, you cannot also deduct the amortisation over years two to five.
How to make a Section 1308 adjustment: step by step
- Identify the intangible asset on the balance sheet. Look at the development costs or intangibles note in your accounts.
- Break down what sits inside it. Isolate the R&D costs (typically staff, subcontractors, externally provided workers, consumables, software licences used in R&D).
- Confirm revenue, not capital, nature. Section 1308 only rescues revenue expenditure. Capital items follow the RDA regime instead.
- Compute the tax deduction to claim. Take the revenue R&D element of the additions in the period.
- Adjust the corporation tax computation. Add back any amortisation charged in the P&L in respect of that asset, then deduct the Section 1308 amount.
- Flag the adjustment in your CT600. Include appropriate disclosure so HMRC can see what you have done and why.
- Feed the same figure into your R&D claim. This becomes qualifying expenditure in the additional information form submitted to HMRC.
- Keep contemporaneous evidence. Timesheets, project records, capitalisation policies and accounting working papers should all be available on request.
Worked example: Section 1308 in action
Company: Innovate Ltd, a UK SME developing a new SaaS product. Accounting period: Year ended 31 March 2026. Accounts treatment: £300,000 of development costs capitalised under FRS 102 s.18 and amortised over five years. £60,000 has been charged to the P&L as amortisation.
Breakdown of the £300,000:
- £220,000 qualifying staff costs (employees directly engaged in R&D)
- £50,000 qualifying subcontractor costs
- £20,000 software and cloud compute directly used in R&D
- £10,000 general overheads (not qualifying)
Without a Section 1308 adjustment: Innovate can deduct only £60,000 in the year (the amortisation), and only the qualifying slice of that amortisation enters the R&D claim.
With a Section 1308 adjustment:
- Add back the £60,000 amortisation in the tax computation
- Deduct £290,000 (the full qualifying revenue R&D spend) under Section 1308
- Net additional tax deduction in year one: £230,000
- Qualifying expenditure for the R&D claim: £290,000
Under the merged R&D scheme from April 2024 (20% above-the-line credit taxed at the main rate), this could translate into a headline cash benefit of roughly £42,000 for a profit-making claimant, or more for an R&D intensive loss maker under ERIS. The Section 1308 adjustment is what makes that benefit available in this year’s return rather than trickled out over five.
Section 1308 under the new merged R&D scheme (AP beginning on or after 1 April 2024)
The merged scheme consolidates the SME and RDEC regimes for most claimants, while R&D intensive loss-making SMEs continue to access enhanced support under ERIS. Section 1308 is untouched by these reforms — it remains a general calculation rule sitting in Part 20 of CTA 2009, independent of whichever relief regime you end up claiming under.
That said, HMRC’s compliance posture has tightened significantly. Claims that include capitalised costs without a clear Section 1308 adjustment, or with weak documentation of the revenue-vs-capital split, are a well-known enquiry risk. The additional information form introduced in August 2023 makes it harder to quietly roll capitalised spend into a claim — so getting the mechanics right matters more than ever.
Common Section 1308 mistakes to avoid
- Treating capital spend as revenue. Section 1308 is not a workaround for capital expenditure. Use RDAs for that.
- Double-dipping. Deducting the full cost under Section 1308 and then also deducting the amortisation in later years is a direct breach of s.1308(5) and (6).
- Forgetting prior years. If Section 1308 was used in a prior period, the capitalised balance on the balance sheet may already be “tax relieved” check before claiming again.
- Rolling overheads in. Only R&D costs that would ordinarily qualify for relief should be picked up not general admin costs sitting inside the asset value.
- No paper trail. Under the current compliance environment, HMRC will ask. You need contemporaneous records linking capitalised costs to qualifying R&D activity.
Frequently asked questions
Is Section 1308 a claim or an automatic provision? It is not a formal claim. HMRC confirms it operates by reference to the tax computation. You do not tick a box you make the adjustment.
Can I make a Section 1308 adjustment in a prior year? Potentially, via an amended return within the normal two-year window from the end of the relevant accounting period, subject to the overlap rules in s.1308(6).
Does Section 1308 apply to tangible fixed assets? No. Section 1308 is limited to intangible assets. For tangible R&D capital spend, look at Research and Development Allowances (RDAs) under CAA 2001.
Do I have to use Section 1308 if I could? No. HMRC confirms it is not compulsory. Some companies prefer to follow the accounts and take relief through amortisation for instance, where doing so smooths profits.
Does Section 1308 survive the merged R&D scheme? Yes. It is a general computation rule and applies regardless of which relief regime you claim under.
Get the Section 1308 adjustment right first time
Section 1308 is short, dense, and easy to overlook yet for any SME capitalising development costs it is often the difference between a modest R&D claim and a transformative one. Getting the adjustment right requires proper analysis of the balance sheet, a robust revenue-versus-capital review, and a compliant tax computation that will stand up to HMRC scrutiny.
At Fiscal Umbrella, we work with SMEs, contractors and founders across the UK to optimise corporation tax positions and unlock R&D tax relief compliantly. If you have capitalised development costs on your balance sheet and want to know whether a Section 1308 adjustment is available, get in touch for a free review of your accounts and tax computation.
https://fiscalumbrella.co.uk/rd-tax-credits-luton/
This article is for general guidance only and does not constitute tax advice. Section 1308 CTA 2009 and R&D tax relief rules are complex and fact-dependent please seek professional advice specific to your circumstances.