The UK tax system provides generous reliefs for companies undertaking qualifying research and development. A qualifying R&D project is one which seeks to achieve an advance in overall knowledge or capability in a field of science or technology through the resolution of technological or scientific uncertainty’.
Most of today’s R&D claims focus on ‘R&D tax relief’. R&D Tax relief focuses on providing tax relief for the revenue expenditure incurred in qualifying R&D, such as employee costs, utilities, materials, software, and subcontractors. Remember, in order to qualify for R&D tax relief under the SME scheme you must have fewer than 500 employees and an annual turnover under €100 million. The SME scheme provides a 230% enhancement on qualifying costs, and where this creates a loss, tax credits at 14.5% can be claimed. Companies exceeding the limits of the SME scheme can instead claim Research & Development Expenditure Credits, (RDEC) which provides an 12% credit on qualifying costs.
Whilst R&D tax relief for revenue expenditure is very generous, many people overlook Research and Development Allowances (RDA) for qualifying capital expenditure. RDA’s are a form of capital allowances offering a 100% first year allowance on qualifying capital expenditure relating to the R&D project.
‘Qualifying expenditure’ is defined as Capital expenditure incurred by a person on research and development directly undertaken by them or on their behalf if-
- they are carrying on a trade when the expenditure is incurred and the R&D relates to that trade or,
- after incurring the expenditure, the individual sets up and commences trade connected with the R&D.
Capital expenditure excluded for RDA purposes includes spending on acquiring rights for intellectual property, as well as the cost of acquiring land, or rights in or over land. However, expenditure incurred in constructing or purchasing a building used for R&D can qualify for RDA’s.
For example, let’s say a company purchases a laboratory required to carry out their research and development. The expenditure on the laboratory itself, but not the land on which it stands, is qualifying capital expenditure for RDA purpose because it is expenditure incurred to provide a facility to carry out research and development. The cost of land must be excluded from the claim and in this regard the legislation requires the expenditure is to be apportioned between the building and the land in a just and reasonable manner.
RDA’s can also be claimed on plant and machinery purchased for research and development which can be extremely beneficial if the company has already used its annual investment allowance for the year.
RDA’s are only claimable up to two years following the end of the accounting period in which the capital expenditures were incurred and therefore it is important that qualifying expenditure is identified in good time.
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