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Research and development activities often require companies to invest in new IT systems, development facilities, machinery, fixings and much more. But did you know that this capital expenditure could well be eligible for Research and Development Allowances (RDAs)?
This generous tax relief can add up to serious extra cash too. Here we take a look.
RDAs (also called R&D Capital Allowances) mean that companies can write down their R&D spending on fixed assets. It’s different to the Annual Investment Allowance in that the relief isn’t capped and - even better than that - R&D Capital Allowances can be received retrospectively up to two years later. Indeed with 100% tax relief available on most R&D capital expenditure, RDAs can make a massive dent in your Corporation Tax bill.
R&D tax relief centres on revenue expenditure, which includes things like materials, wages, subcontractor payments and certain overheads. Yes it’s generous, offering companies 230% tax relief on qualifying expenditure. However, very little attention is given to the 100% tax relief claimable for capital expenditure on R&D facilities. This lack of attention may be due to the Annual Investment Allowance which was launched back in 2008, as it too provides 100% tax relief for certain expenditure.
AIA used to mean 100% relief for eligible expenditure up to £200,000. However, from the 1st January 2019 this was temporarily increased to £1 million for two years. In November 2020 it was announced that this increase would be extended for another year.
However, even with the AIA having been considered, RDAs are still worth taking a look at.
The big advantage between the two is that RDAs are available on a far broader range of eligible expenditure than the AIA. The AIA is only available on integral features, or plant and machinery. Conversely, almost all capital expenditure on facilities used in the R&D process (except for intellectual property and land) can be claimed under the RDA.
As an example, a company has built a laboratory on a piece of land and kitted it out with various items of machinery and integral fittings. The entire cost of building a laboratory (excluding the land) would qualify for relief under RDAs, whereas only machinery, integral features and plant would be eligible for AIA, up to a maximum of £1 million.
Most capital expenditure related to R&D work should be treated as qualifying expenditure. As mentioned, the main exceptions to this are land costs, and costs around intellectual property.
Research and Development Allowances can be claimed as long as a commercial building has a specific area designed for R&D activities. If this R&D “area” is part of a larger building then RDA is available on the whole building in its entirety. This is as long as the R&D centre is at least 75% of the total cost. If it doesn’t equate to 75% of the costs, then the building should be apportioned according to floor space. This may not always be clear, so our team will be pleased to advise.
Common examples of capital expenditure would be things like company cars for R&D workers and laboratory equipment. However, less obvious examples include new IT systems, materials, equipment, devices and software that facilitate technological and/or scientific advancement. Again, it’s not easy to always identify capital expenditure and there are many grey areas. This is where the Myriad Associates team can work with you.
Research and Development Allowances and R&D Tax Credits go hand in hand. R&D Tax Credits relate to operational costs such as materials, overheads and staff costs, however - as we’ve seen - RDAs are about expenditure on fixed assets.
RDA claims work in a similar way to R&D Tax Credits in that you’re reducing your taxable profits by writing off fixed assets in the year of acquisition. If RDAs and R&D tax relief together create a taxable loss, then companies can surrender these losses for a cash payment at a rate of 14.5%. Note that the maximum loss that can be surrendered is 2.3 times the value of the R&D expenditure covered by an R&D Tax Credits claim.
The most important thing when claiming Research and Development Allowances is in maintaining accurate accounting records. The RDA should be correctly reflected in your tax computations and CT600. Expenditure must be apportioned correctly and meet the prescribed criteria.
It’s also well worth providing HMRC with a schedule of the eligible capital expenditure, alongside a short project brief that explains why the capital expenditure was made. It should also confirm that the expenditure relates to the trade the company carries out. This too is something our team is experienced in.
As RDAs and R&D Tax Credits are closely related, it makes sense to complete both applications and file them at the same time. However, it’s true that many companies choose to apply for R&D Tax Credits as an amendment to their CT600 later. There are indeed certain benefits to doing this, as we’ve recently looked at in our Tax Cloud article: What Is The Most Efficient Way Of Submitting An R&D Tax Credit Claim?
The fact is that claiming RDAs alongside R&D Tax Credits is a smart financial move. When combined they release cash that can be ploughed back into your business. This can be spent on anything - including on further R&D projects. Often worth tens of thousands of pounds, it’s money that businesses can’t afford to miss.
Myriad Associates is a leading consultancy of specialists in R&D Tax Credits, Capital Allowances and all areas of R&D funding. If you would like to discuss anything we’ve raised in this article, or indeed get the ball rolling on a claim, please call us on 0207 118 6045. If you prefer, you can send us a message and one of the team will be pleased to get back to you.