Can large one-off costs incurred on buildings or equipment be included in an R&D claim?
Our clients often ask whether costs that have been incurred purchasing or developing physical assets in relation to their qualifying Research & Development (R&D) projects, for example a piece of machinery or a building developed for their R&D activities, are costs which can be recovered via the R&D tax incentive.
Generally, as expenditure incurred on such items should be booked to your balance sheet as a tangible fixed asset, these types of costs will not qualify for the R&D tax credit incentive. Instead, they will qualify for a different type of tax relief - Research and Development Allowances.
As a specialist in this area of tax, we will be able to advise you which form of tax incentive or tax allowances your costs could qualify for and ensure any benefits available to you are fully optimised.
What are Research and
Development Allowances?
Research and Development Allowances (RDAs) rely on the same definition of R&D as R&D tax credits. They are in effect, a form of capital allowances (tax relief available on certain types of physical assets) and are available on assets which are used for:
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The purposes of carrying out your R&D; or
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Providing facilities for carrying out your R&D.
It is important to note that costs incurred on qualifying R&D software projects which are booked to your balance sheet as an intangible fixed asset can potentially be included in an R&D tax credit claim and treated in line with other qualifying operational costs.
How do Research and Development Allowances work and what are their value?
Where an asset or facility will be used for qualifying R&D activities, RDAs provide a 100% write-off against your taxable profits on this proportion of its overall cost in the year it was purchased.
For example, if you spent £100,000 on a piece of machinery which qualified for RDAs in its entirety, by submitting an RDA claim you would be able to deduct £100,000 from the company’s taxable profit.
At the current corporation tax rate of 19%, this would generate a £19,000 reduction in corporation tax payable. The deadline for submitting an RDA claim is the same as an R&D tax credit claim.
What are the benefits of a Research and Development Allowances claim?
There are two key advantages of undertaking an RDA claim over other forms of capital allowances available.
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Tax deduction against building costs – Costs you spend purchasing or developing a building will often not qualify for any other forms of capital allowances or tax relief when incurred. Therefore, by undertaking an RDA claim you could obtain a tax deduction which would have otherwise not been available to you. This is an absolute cash benefit to the company.
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Cash flow - Other forms of capital allowances limit the amount of expenditure which can qualify for a 100% write-off in the year of purchase and instead offer tax relief over several years. Therefore, in certain cases, undertaking an RDA claim can significantly improve your cash flow position.
What about the new super-deduction announced in the March 2021 budget?
To encourage capital investment by UK companies, the Government announced that between 1 April 2021 - 31 March 2023, companies will benefit from a super-deduction against taxable profits of 130% of the costs it incurs on plant and machinery assets in this time.
Importantly, this new relief should not cover costs incurred on buildings or on assets with an expected life of greater than 25 years and therefore RDAs may still potentially provide a valuable source of tax relief to you which would have otherwise been unavailable. Whilst an RDA claim won’t always reduce your taxable profit in a given year due to the availability of other capital allowances, we will always fully advise of its potential cash benefit to you and where appropriate prepare an RDA claim on your behalf.