Research and Development Capital Allowances (RDAs) provide businesses with 100% tax deductions for capital expenditure incurred on development, equipment, or facilities used in carrying out research and development activities. But with full expensing and increase annual investment limits this allowance has been overlooked. When can a claim provide your business with considerable benefits?

What are R&D allowances?

RDAs can be claimed for capital expenditures on R&D development, and assets and facilities used for R&D. R&D capital allowances provide a 100% tax relief rate of the cost incurred, and, unlike regular capital allowances, they provide the tax reduction across a wide range of expenditure types. In contrast to the Annual Investment Allowance or Full Expensing, RDAs are highly beneficial for assets not covered by plant and machinery allowances, or where the development relates to an asset with a lifetime over 25 years (long-life assets). By making use of this scheme, your company could gain access to cash that can be reinvested in future growth.

RDAs sit alongside your R&D tax credits claim and can form a key part of your incentives strategy. Unlike the R&D tax credits that are limited to revenue expenditure only, making an RDA claim will reward an innovative business for incurring capital expenditure as part of their R&D efforts. Your R&D tax credits cover the operational costs such as staff costs, subcontractors, and consumables, whereas your RDA claim will cover the capital expenditure on assets. Therefore, you cannot claim both RDAs and tax credits on the same expenditure. However, by claiming both incentives, you can lower your taxable profits by writing off your fixed assets in the year they were purchased.

The types of assets that would benefit from an RDA claim could include:

• Energy generation facilities

• Interconnector cables

• Laboratories or R&D facilities

• Transportation infrastructure

• Waste or water processing facilities

What is the benefit of claiming for RDAs?

The significant benefit of making an RDA claim kicks in when considering buildings or long-life assets. Costs linked with the building's structure and fabric do not qualify for the full expensing, super-deduction or AIA claims, and long-life assets are only eligible for full expensing for 50% of the costs. If you've invested money in the structure of the facility where you’re undertaking qualifying R&D, or you’re involved in developing an innovative long-life asset then an RDA claim will be more beneficial. Compared to the 3% structure and building allowance (SBA) for qualifying construction or renovation costs for non-residential buildings or 6% for long-life plant and machinery assets, making a 100% RDA claim for this expenditure will provide a substantial tax benefit.

Can our business claim RDAs?

Although there has been significant growth in the number of companies making R&D tax credit claims claims for revenue expenditure, claims for RDAs on capital investments have lagged.

RDAs and R&D tax credits both use the same R&D definition. This means that if your company is innovating by developing new goods, processes, materials, or services (or improving current ones) and investing in capital assets, you may be eligible for RDAs. RDA claims must be accompanied by a legitimate R&D tax relief claim report that outlines the qualifying activities and any RDA qualifying costs, which is why it helps to get an R&D tax specialist involved.

Any RDA must be claimed within two years, just like any other capital allowance claim. If the company disposes of the equipment for R&D purposes, whether during or after the period, the tax exemption is not clawed back.

How we can help

Because RDAs and R&D tax credits are based on the same definition of R&D, we can assist any business claiming capital allowances to guarantee you‘re getting the most out of them. RDAs can't always boost the value of your capital allowances claim if the costs are already cover by AIAs or full expensing, so getting guidance from a firm that can handle all capital allowances is essential. However, do note that if you miss the claim deadline you will lose your chance to benefit from this scheme.

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