Tax savings for capital expenditure relating to Research and Development (R&D) activity
Research and Development Allowances (RDA)
Tax relief is available for capital expenditure incurred for R&D purposes through RDAs.
This often overlooked, yet valuable relief provides 100% tax relief in the year of acquisition for capital expenditure incurred for the provision of R&D facilities or expenditure on capital assets used by employees carrying out R&D.
We would advise any company or sole trader engaged in qualifying R&D activities to consider RDAs to ensure they are not missing out on this relief.
RDAs: Interaction with Capital Allowances
Ordinarily, when a company purchases a capital asset, relief is generally available for qualifying assets in two ways.
Firstly, the Annual Investment Allowance (AIA) which provides a 100% deduction on qualifying expenditure in the year in which an asset is purchased. AIA is capped at £200,00 per annum.
If the AIA limit is exceeded, or the asset purchased does not qualify for AIA, the balance is subject to a writing down allowance of 18% or 8% per annum depending on the nature of the asset. Certain non-qualifying assets are not eligible for relief at all.
RDAs, however, work similar way to AIA but instead the relief is uncapped. This means that if significant capital expenditure is incurred in a year, relief for their cost will be available earlier than it would usually.
Example RDAs project
To illustrate, a company which is involved in R&D decides to construct a new £500,000 property on land (which it already owns) to be used solely for the purposes of developing their products.
Under normal rules, AIA or writing down allowances would not be available on the bulk of the construction costs of the property. But with RDAs, as the property is solely used for the purposes of R&D, all of the £500,000 cost would be qualifying expenditure, meaning the company could claim a £500,000 deduction in their corporation tax computation. This would create a tax saving of £95,000 [almost £100,000] not available through Capital Allowances.
(If the factory constructed was used for mixed purposes, for example, half used for R&D and the other half used for non-qualifying R&D activities, an adjustment would have to be made to reflect the qualifying area of the property.)
Which costs can qualify for RDAs
As the above example illustrates, RDAs are not restricted to ‘qualifying assets’. Instead, relief is available on all capital costs associated with the undertaking of qualifying R&D projects with the only exclusion being land. This means that the cost of acquiring, constructing or extending existing premises could qualify for RDAs