Research and Development Capital Allowances

Research and Development Capital Allowances, also known as RDAs, provide a 100 per cent first year allowance for R&D capital expenditure. RDAs are the capital expenditure equivalent to the R&D tax relief scheme.

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.

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:

• constructed or purchased a laboratory, test bed, or pilot plant
• capitalised large amounts of R&D expenditure

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 and in their CIRD manual. Further detail can also be found in section 1308 of Corporation Tax Act 2009 (which in turn updated section 53 of Finance Act 2004) 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.:

• laboratories,
• other research facilities,
• research equipment,
• company cars used by people undertaking the R&D, and
• a new IT system for internal use in the R&D facility etc. etc.

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

• Research & Development Tax Credit
• Research & Development Expenditure Credit
• Patent Box
• Creative Sector Tax Reliefs including Video Games Tax Relief, Animation Tax Relief, High-End TV Production Tax Relief, and Film Tax Relief

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.

• The original source legislation (contained in the 2001 Capital Allowances Act Part 6)
• HMRC’s published guidance in their Capital Allowances manual for RDAs ;
• HMRC’s published guidance in their Corporate Intangibles and R&D manual (CIRD) re the treatment of revenue versus capital expenditure.

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); and representatives from professional bodies.

External links

• HMRC
• HMRC Capital Allowance manual re RDAs

The Research and Development Expenditure Credit (RDEC) is a new UK tax incentive designed to encourage large companies to invest in R&D. Companies can reduce their tax bill or claim payable cash credits as a proportion of their R&D expenditure.

The initiative builds on the existing R&D Tax Credit scheme which has been in operation for large companies since 2002. The new scheme is colloquially known as Above the Line R&D Tax Relief because the payable credit for large companies is now above the tax line and can effectively be accounted for as income in the profit and loss statement.

History

R&D tax relief is designed to incentivise investment in R&D. The scheme was introduced in 2000 for small and medium enterprises, with a separate scheme for large companies launched in 2002.

Any company carrying out R&D is likely to qualify for the relief. The definitions of eligible R&D and costs are reasonably broad, and eligible R&D can be found in completely unexpected areas.

Large companies could previously only offset the credit against corporation tax liabilities. This meant large businesses running R&D cost centres in the UK, but with profit centres outside the UK, were unable to benefit from the relief. It also meant the credit was largely invisible to R&D decision-makers because it was embedded in the tax computation.

As a result of lobbying from industry, the government launched a consultation in the 2012 Budget on changes to the Large Company R&D Tax Relief scheme. In the March 2013 Budget, the Chancellor of the Exchequer confirmed the new R&D Expenditure Credit for large companies with a payable rate of 10 per cent for R&D expenditure incurred after 1 April 2013 (an increase on the original proposal of a 9.1 per cent payable credit).

This new credit is designed to make R&D relief more visible to those making R&D budgeting and investment decisions. It should also provide better cash flow for companies with no corporation tax liability, and thus should promote the UK as the preferred location for multi-national corporations deciding where to site their R&D operations. It will also help to improve corporate earnings because it now appears above the tax line.

Overview

The 10 per cent payable credit rate equates to a net benefit post-tax of 7.7 per cent of eligible expenditure for large companies (at 23 per cent corporation tax from April 2013). The definitions of large and small company size are driven by the EU classifications (and adjusted for UK R&D Tax Credit purposes) including revenues, number of employees and balance sheet assets.

The existing large company superdeduction scheme will continue to run in parallel with the new RDEC until April 2016, allowing a large company to claim the payable credit above the line or to deduct an additional 30 per cent of its eligible R&D costs in its tax computation.

The steady state cost, after the initial phasing-in period, of the new RDEC is forecast to be approximately £265 million per annum (£170 million per the original proposal, plus £95 million for the increase in the payable rate to 10 per cent) in terms of corporation tax revenues foregone by HM Treasury.

How it works

In all respects, the RDEC will work like the existing R&D Tax Credit. The nature of the tax relief has not changed, only the method of delivery of the tax relief.

There are various principles which need to be respected. Eligible R&D must be:

• seeking to achieve an advance in science or technology
• subject to scientific or technological uncertainty
• conducted in a systematic and thorough fashion

Eligible costs include staffing costs, consumable costs, software, subcontractors and research contributions. Critically these costs must be mapped to the eligible activities.

How to claim

The claim process is as follows:

• assess qualifying R&D activity
• calculate qualifying R&D expenditure
• submit the figures in the CT600 tax return

HMRC recommend adequate record-keeping of eligible activities and eligible costs to provide a coherent audit trail in case of an enquiry by HMRC.

Details in the legislation to look out for

• eligible R&D activity
• eligible R&D costs

Other technology tax reliefs

• Research & Development Tax Credit
• Research & Development Capital Allowances
• Patent Box
• Creative Sector Tax Reliefs including Video Games Tax Relief, Animation Tax Relief, High-End TV Production Tax Relief, and Film Tax Relief

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 the R&D Expenditure Credit.

• The original source legislation (contained in the 2013 Finance Bill);
• HMRC’s published guidance in their Corporate Intangibles and R&D manual (CIRD);
• The Department for Business, Innovation and Skills guidance (now incorporated into the CIRD manual – see above)

Government working group

The government established a Working Group, to complement ongoing public consultation on the R&D Tax Relief initiative and to discuss options and proposals in more detail. Members of the 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); and representatives from professional bodies.

External links

• HMRC
• HMRC CIRD re R&D Tax Relief
• Department for Business, Innovation and Skills