Research and Development Capital Allowances

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Research and Development Capital Allowances, also known as RDAs, are a tax relief for businesses in the United Kingdom. They provide a 100 per cent first year capital allowance for research and development (R&D) capital expenditure. RDAs are the capital expenditure equivalent to the R&D tax relief scheme.

Contents

History

RDAs were the new name given to Scientific Research Allowances (which already existed) when the R&D Tax Credit scheme was launched in 2000. [1]

Overview

R&D Tax Relief only applies to revenue expenditure - generally, costs incurred on day-to-day operations, as opposed to expenditure on capital assets. However, RDAs allow relief for R&D capital expenditure as a capital allowance. RDAs make it possible to claim 100 per cent of the capital cost against taxable profits in the year the cost is incurred. This can deliver a helpful cash flow boost and a shortened payback period. A company should consider applying for RDAs if it has:

If any R&D revenue expenditure is capitalised in a company's accounts, it may still qualify for R&D Tax Relief or it may only qualify under RDAs. The accounts treatment when the asset is recognised on the balance sheet, as opposed to being written-off immediately in the profit and loss account, is not conclusive of whether the expenditure is revenue or capital for tax purposes. The distinction between revenue and capital expenditure in the context of its R&D tax treatment is critical. HMRC give details on how to distinguish between the two categories on their website [2] and in their CIRD manual. [3] Further detail can also be found in section 1308 of Corporation Tax Act 2009 [4] (which in turn updated section 53 of Finance Act 2004) [5] in relation to the revenue treatment of capitalised costs which relate to intangible assets.

How it works

RDAs are available for expenditure of a capital nature on R&D related to a company’s trade, e.g.:

So, unlike for R&D Tax Relief where only certain categories of expenditure can be claimed, RDAs are available on most expenditure incurred for the carrying out of, or provision of facilities for, R&D (except land and the cost of acquiring intellectual property). This includes building or premises assets which would not otherwise qualify for alternative forms of capital allowances (such as the Annual Investment Allowance).

This means that where a company acquires or builds property with the intention of using the property for the purposes of carrying on qualifying research and development, then most, if not all, of the expenditure involved will qualify for a 100 per cent capital allowance in the accounting period in which the expenditure is incurred.

Other technology tax reliefs

The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) give generous income and capital gains tax relief to individuals who invest in small early stage businesses.

See also

There are various sources of information about RDAs.

Government working group

There is no formal government working group for RDAs. There is however a formal working group for R&D Tax Relief to assist and develop government thinking on R&D tax initiatives. Members of this Working Group include representatives from: HMRC and HM Treasury; industry; the financial services community including large accounting firms (PWC; Deloitte; KPMG; Ernst and Young) and independent consultants (MMP Tax); (Cashin Innovation Consulting); and representatives from professional bodies.

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References

  1. ↑ HMRC, " ca60100"
  2. ↑ HMRC, "revenue V capital expenditure"
  3. ↑ HMRC, "CIRD81700"
  4. ↑ Corporation Tax Act, "Section 1308"
  5. ↑ Finance Act, "Section 53"
  6. ↑ Capital allowances Act,"Part 6"
  7. ↑ HMRC, "Capital allowances manual"
  8. ↑ HMRC, "revenue V capital expenditure"
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