Don’t forget research and development (R&D) capital allowances!

The issue

R&D tax credits have been around for over 20 years now.  However, many people are unaware that the regime can provide an enhanced form of capital allowances tax relief.

Companies which incur capital expenditure on facilities used for R&D purposes are entitled to a special form of R&D allowances (‘RDAs’).  There are two key benefits under this regime.

The benefits

1. 100% First year allowance

Expenditure which qualifies for RDAs is given as a 100% first year allowance.  This applies separately to the Annual Investment Allowance, and unlike AIA there is no limit on how much can qualify for the 100% RDA allowance.  This is likely to become increasingly relevant when the AIA, which is currently set at £1 million per annum,  falls to £200,000 from 1 January 2022.

2. More generous category of qualifying expenditure

The definition of “qualifying expenditure” for RDA purposes includes “all capital expenditure incurred for–

(a) carrying out research and development; or
(b) providing facilities for carrying out research and development.”

This means that buildings – which might otherwise comprise of elements of “non-qualifying” expenditure such as doors, windows, brickwork etc. – can be included in the claim to the extent that they are used for R&D purposes. This includes building, extending, refurbishing, and purchasing property in which R&D activities take place (although land is excluded).

Often, the non-qualifying elements of properties could account for 70%-80% of the cost of constructing a building.  The introduction of structures and buildings allowance in 2018 has provided some relief for these types of cost, although this allowance is provided at a very low rate, and no AIA can be claimed.  A claim under the RDA regime will therefore usually be very worthwhile.

Example

Boffins ‘R’ Us Ltd builds new premises at a cost of £2.5m, including £1m of plant and machinery.  Half of the building comprises laboratories for R&D activities.

Without a claim for RDAs, £1 million of capital allowances are available, covered by AIA.  The other £1.5 million does not qualify for relief.

With a claim for RDAs, a further 50% of the non-qualifying building elements relating to the laboratory space can be claimed.  This provides a further £750,000 of allowances, worth £142,500!

There are no provisions in place to claw back relief if the building is later used for a different purpose, although the usual rules relating to onward sales (where disposal proceeds may need to be brought into account) apply.

Forbes Dawson view

Although there is much hype about R&D deductions and tax credits, RDAs can get lost in the noise. Although these will usually only be a tax deferral, rather than a saving, such a deferral can ease cash flow at a time when it is most needed.

 

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