What are Research & Development Allowances?
Research & Development Allowances (RDAs) are often overlooked, but are an extremely valuable relief. They provide 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 strongly advise any company engaged in qualifying R&D activities to consider RDAs to ensure they are not missing out on this relief.
RDAs: Interaction with Capital Allowances
RDAs are similar to Annual Investment Allowances (AIA), which provide 100% tax relief on certain capital expenditure. Whilst AIAs are capped, currently at £1m per annum until 31 December 2021, RDAs are uncapped.
RDAs are valuable, even when a company can claim AIAs or the new 130% Super Deduction Capital Allowance, as they cover expenditure which may not be eligible for other allowances.
Example of a Research & Development Allowances project
For this example, a company 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, Capital Allowances would not be available on the bulk of the construction costs of the property.
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 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.
Qualifying costs for Research & Development Allowances
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.
