Research & Development Allowance
07 April 2017
An overlooked area of Tax Relief for those that carry out Research & Development.
A lot of focus over recent years has been on the availability of Research and Development (R&D) tax incentives to encourage investment in innovation in the UK. For companies developing new products, processes, materials or services, it is likely that R&D tax incentives will continue.
However, additional tax savings are also available for capital expenditure incurred for R&D purposes through the Research and Development Allowance (RDA).
What is RDA?
The RDA is a generous 100% first year tax relief for fixed asset capital expenditure carried out by trading companies, individuals and partnerships. It is a first year allowance that can only be claimed in an open year and the expenditure must have been incurred in the same year. Expenditure must be incurred in carrying out R&D and HMRC’s normal definition of R&D 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.
Typical items of capital expenditure which qualify for relief through RDA’s are the cost of buildings in which R&D is carried out and equipment used to conduct the R&D activity such as computers, tools testing equipment and even cars.
However, it is important to note that:
- A claim can only be made for a new asset (i.e. it’s not possible to make a claim for an asset which is transferred from manufacturing to R&D).
- When capital expenditure is incurred on a property for research and development purposes, only the building itself potentially qualifies for RDA and not the underlying land.
- A claim can be made for a designated part of a building where R&D activity is carried out so long as that part is readily identifiable.
- The main benefit of RDA’s is that they can give 100% tax relief on items for which no capital allowances or Annual Investment Allowance (AIA) is normally claimable – such as a laboratory used for research.
- There is no upper limit on the amount which can be claimed (unlike AIA).
- It is only available to traders. A person carrying on a profession or a vocation is not able to make a claim.
- If RDA is claimed in relation to a property used for qualifying R&D 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 then 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 made.
The RDA tax relief for building costs can be substantial and it is, therefore, recommended to seek expert assistance. If you would like to discuss this in greater detail please get in touch with us.