Research and Development Allowances provide additional tax savings to those that carry out Research and Development. Here’s how…

Research and Development Capital Allowances, also known as RDA’s, are a tax relief for businesses in the United Kingdom.  They provide a generous 100% first year tax relief for fixed asset capital expenditure carried out by trading companies, individuals and partnerships.  Research and Development Tax Credits can only be claimed by companies.  It is a first year allowance that can only be claimed in an open tax return and the expenditure must have been incurred in the same financial year.

HMRC’s normal definition applies:

‘A company must be undertaking a project to seek an advance in science or technology through the resolution of scientific or technological uncertainties.  The advance being sought must constitute an advance in the overall knowledge or capability in a field of science or technology and not a company’s own state of knowledge or capability alone.’

Two people testing in a laboratory

Understanding Qualifying Expenditure for R&D Tax Relief

Capital Expenditure

  • Research and Development tax relief is only available for ‘revenue expenditure’ (generally day to day running costs, rather than capital expenditure).  If you are involved in Research and Development and you have spent money on capital assets then certain expenditure can still qualify for RDA’s.
  • It would be necessary to identify and clarify what constitutes as qualifying expenditure.

Examples of qualifying expenditure for RDA are:

  • The costs of buildings in which the R&D is carried out and the equipment used to conduct the R&D activity all qualify.  The expenditure for example, may be for laboratories, research facilities, offices, research equipment, information technology and even cars.
  • It is important to note that when capital expenditure is incurred on a property for research and development purposes, only the building itself potentially qualifies for RDA and not the land.
  • Claims can be made for the designated part of the building where the Research and Development activity is carried out but this must be readily identifiable.

Distinction of Revenue and Capital

  • A detailed review is carried out in order to satisfy the conditions of what HMRC would accept as being ‘qualifying expenditure’ for the purposes of claiming allowances.

Unlocking the Benefits of R&D Allowances: Claiming and Restrictions

Benefits

  • The main benefit of RDA’s is that they can give 100% tax relief on items for which no capital allowances (or AIA) are normally claimable, such as a laboratory used for research etc.
  • There is no upper limit on the amount which can be claimed (unlike AIA)

Claiming

  • Relief can be claimed on the current tax return or by amending a previous tax return subject to the usual time limits of submitting an amended return.

Restrictions

  • RDA’s are only available to traders.  A person carrying on a profession or a vocation is not able to claim.
  • If RDA’s are claimed in relation to a property used for qualifying Research and Development and the property is then used for another purpose, there are no provisions to claw back the allowances relating to the property.
  • If the property is disposed of and the disposal value is more than any unclaimed RDA, there is a balancing charge.  An unclaimed RDA is the part of the 100% first year allowance that was not claimed.  The amount of the balancing charge is the smaller of: the amount by which the disposal value exceeds any unclaimed RDA and the RDA was made.
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