R&D tax relief and Capital Allowances

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A capital allowance is an expense that a company can claim against its taxable profit, reducing its tax liability and improving cashflow. In the UK there are several different types of capital allowance, covering Plant and Machinery (P&M) as well as more specific costs including research and development and patents.

Like R&D tax relief, capital allowances can be misunderstood and often underclaimed. Here’s our brief guide to the benefits of claiming capital allowances, and how this affects claims for R&D tax relief.

How do I go about preparing a claim for Capital Allowances?

Much like preparing a claim for R&D tax relief, the key thing when preparing a claim for capital allowances is to know which capital allowances your client is able to claim, and which costs can be included.

In the context of claiming R&D tax relief, the key capital allowances to consider would be the Annual Investment Allowance (AIA), which covers most plant and machinery (except cars), and Research and Development Allowance (RDA), which covers capital expenditure incurred for carrying out R&D, and for providing R&D facilities.

Once you’ve identified which capital allowances to claim, it’s then a case of combing through your client’s capital expenditure in the tax year to identify which costs can be claimed and which allowance is most suitable for each particular cost.

What benefits come from claiming Capital Allowances?

The main benefit of claiming capital allowances is that it enables a company to reduce its corporation tax liability, either in the year that the capital asset was purchased or over several years. For companies carrying out R&D, being able to deduct the full cost of R&D facilities in the year in which they were purchased would improve cashflow and potentially justify continuing or expanding R&D efforts, especially where claimed in conjunction with R&D tax relief.

How do Capital Allowances and R&D tax relief interact?

The short answer to this one is that they don’t! R&D tax relief and R&D allowance are complementary schemes, where the costs claimed in one cannot be claimed in the other. However, they do share the same definition of research and development, with a couple of notable additions in the case of RDA to cover oil and gas exploration.

If your client is carrying out R&D as defined in CIRD81300 and you’d advise them to claim R&D tax relief, it’s almost certainly worth extending that conversation to cover RDA.

This could enable your client to get tax relief on capital costs that you’ve had to exclude from the R&D tax relief claim, which can include research facilities, research equipment, even cars used by employees to travel between research sites!

Look out for a guest blog post from Alan Cadden of Cavetta Consulting in the next week or so, where Alan will talk about the top 5 tips for claiming Capital Allowances on property.

How to write an R&D tax relief technical narrative

With HMRC’s new mandatory requirement for project descriptions on all submissions, we wanted to share our experiences to help others to write their best possible technical narratives.

Available to download here.

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