Capital Allowances can be an excellent source of tax relief. Sometimes, however, their interaction with R&D Capital Allowances can actually be costly. So, when deciding what is right for your business, it’s important to seek expert support when you’re weighing up the benefits and pitfalls of different Capital Allowances versus R&D Capital Allowances.
We put together this guide to talk you through all the key things you’ll need to consider with Capital Allowances.
What do we mean by R&D Capital Allowances?
R&D Capital Allowances refer to tax deductions that can be made for EITHER:
Capital expenditure on research and development; or
Assets used for the purposes of research and development; or
The provision of facilities that are used to undertake research and development.
You can qualify for R&D Capital Allowances if your company is undertaking qualifying R&D activity. This could include developing or improving:
If you qualify for R&D tax incentives, you could be in line for up to 100% in tax deductions for any related capital expenditure. Given the broad areas covered by R&D Capital Allowances, companies can stand to benefit significantly when their expenditure qualifies, including potential reductions to your corporation tax bill.
When can I claim R&D Capital Allowances?
You can claim R&D Capital Allowances (known as ‘RDAs’) for up to a year after the deadline for the filing of your tax return. Effectively, this means you can claim RDAs for up to 2 years after the accounting period that their costs were incurred.
To save on adviser fees, it is a good idea to identify any potential RDAs at the same time as preparing your R&D Tax incentives claims. This is because the rules are linked; if you claim expenditure that is eligible for R&D tax incentives, you can’t also claim RDAs for the same expenditure, and vice versa.
What are the different types of Capital Allowances?
There are numerous types of Capital Allowances that currently exist. Essentially, whether you can access them or not depends on how much you’re spending and what you’re spending it on. Three of the major types of capital allowances include:
This stands for Plant and Machinery Allowances. PMAs can be claimed when buying assets kept for use by your business, such as equipment, machinery, business vehicles, and for some elements within property purchases or construction costs.
There are two types of PMAs; usually referred to as General Pool and Special Rate Pool. They have differing rates of relief; 18% and 6% respectively, so it’s crucial to allocate to the best pool possible to benefit from the relief sooner.
This stands for the Annual Investment Allowance. It is a first-year tax relief for UK businesses to use against the purchase of business equipment. The AIA can be used to accelerate the relief of most types of assets that fall within the General and Special Rate Pools, subject to an annual maximum – currently £1million.
This stands for Research and Development Allowances. It is claimable as a tax deduction for certain types of R&D expenditure, which can include items not eligible for the AIA or PMAs.
As you can see, there is a certain amount of overlap across currently existing Capital Allowances. However, imagine you bought a piece of machinery for your business. If you claimed PMAs for it, you could deduct up to 18% of the machine cost from your tax bill each year. If you claimed AIAs, the total cost of the machine could be deducted in the year of purchase. If the machine was eligible for RDAs, you could also qualify for up to a 100% tax deduction for its costs in the year of purchase.
Whilst that example is fairly simple, the overlap between the allowances can make it hard to unpick which will save, or even make you, the most money. At Cooper Parry, our tax advisers love solving these sorts of complex issues. And we always talk to you in a straight, easy-to-digest manner.
How do RDAs compare with other Capital Allowances?
RDAs do tend to outperform other Capital Allowances because of the wide range of areas they cover. For example, they can cover equipment costs (if they are used for research and development). But unlike AIAs and PMAs, they can also cover expenditure on the facilities that are used to undertake the R&D.
There is no cap on qualifying expenditure for RDAs, which is not the case for AIAs.
Other things you should consider include:
The right Capital Allowance choice will vary from company to company.
Some expenses might qualify for all 3 types of capital expenditure, but you need to decide which is the most beneficial for you (that’s where we can help).
AIA has a cap of £1million (dropping to £200,000 from 1.1.2021) per group of companies per year. You should not use this up on something that RDAs can instead be claimed on (which has no cap).
Certain types of plant and machinery expenditure that isn’t covered by the AIA, may be eligible for RDAs.
RDAs support for qualifying plant and machinery expenditure is 100% compared to the 6% and 18% available on the two PMA pools (where the AIA limit has been exceeded).
For maximum benefit, all areas involved in R&D should be included in a claim for RDA.
The interplay between the different capital allowances can quickly get complicated. But at Cooper Parry, it’s exactly these sorts of issues that our tax geeks love finding solutions to.
Can I claim R&D tax incentives and RDAs?
Whilst RDAs often appear to be the most attractive Capital Allowance, they’re not always the best tax relief available. They often work best when used alongside other available Capital Allowances.
Although you can’t claim RDAs and R&D tax credits on the same expenditure, you can claim them both in the same year on different expenditures. That means the trick is ensuring you maximise the reliefs that give you the best possible outcome.
What does this all mean for your business?
Generally speaking, RDAs are a great way to access a generous tax relief if you are an innovative company, no matter the industry. This is because you can receive 100% tax relief on pretty much any capital expenditure on R&D and benefit from massive reductions to corporation tax. However, you need to seek expert advice to make the decision between R&D tax credits or RDAs.
RDAs are also the best way to receive support for facilities like buildings, labs, and other areas not covered under PMAs or the AIA. So, if you’ve invested heavily in larger facilities for your R&D, this funding stream should not be overlooked.
Making the most of RDAs can be challenging. At Cooper Parry, we’re experts in the field and love solving complex tax problems. Want to find out more about the potential benefits your business could stand to gain from R&D Capital Allowances? Get in touch with our straight-talking tax geeks today.
If you’re interested in finding out if you could claim these generous R&D tax credits, or if you’d like a second opinion on a claim you’re already making, we’d love to discuss it with you.