Capitalisation of wages

brownem

Good afternoon,
I have recently taken over the payroll for a client, I currently do his bookkeeping for him. He has asked if I can capitalise two thirds of the wages of an employee who is currently paid through PAYE. This is not something I have come up against before, I appreciate that work done by an employee can be capitalised as R&D if that is the nature of the engagement, but if they are paid through the PAYE system, can I then allocate a percentage of that wage to R&D or would this be bad accounting practice? Any advise would be gratefully received, my gut feeling is this doesn't sound correct and if this is not the correct treatment then I need to be able to explain clearly and concisely to my client why this can't be done this way?
Thanks in advance

CeeJaySix

Brownem,

The capitalisation of wages has nothing to do with how he is paid - why would you pay someone employed full time on a capital project (not limited to R&D, and not all R&D is capital) through a different method to the rest of your workforce? The bookkeeping entry is simply a debit to the fixed asset code rather than to P&L wages and salaries for the proportion of their time spent on qualifying work.

Whether or not the employee's wage is eligible for capitalisation, and what proportion of it, is entirely another story and likely to require more detail from the client and more work on your part. Are you also preparing CT returns?

brownem

Hi, thanks for your response. No, I purely do the bookkeeping for this client. I do need to do a bit more investigation into the nature of the capitalisation before committing anything to the accounts, I just really wanted to know that in theory this could be done and was legitimate. Thanks again for your help.

CeeJaySix

No problem; depending on what the wages actually relate to, it may be easier for all concerned to leave everything in wages and salaries until the year-end, then let the year-end accountant consider what should be capitalised along with the tax implications.

Of course if he is wanting the adjustment to reflect in monthly management accounts or similar this may not be an option; however you can be sure that whoever does the year-end accounts will want to unpick what you have capitalised and check it has been treated correctly, especially if relying on it for tax comps, so in effect there will likely be some duplication of work (and therefore fees to the client).