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 provides relief for qualifying revenue expenditure incurred in R&D, such as employee costs, utilities, materials, software and subcontractors. The SME scheme provides a 230 per cent enhancement on qualifying costs, and where this creates a loss, tax credits at 14.5 per cent can be claimed. An SME is defined as a company with fewer than 500 employees, having an annual turnover under £100 million and/or assets of not more than £86m. Companies exceeding the limits of the SME scheme can instead claim Research & Development Expenditure Credits, (RDEC) which provides an 11 per cent 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. RDAs are a form of capital allowances offering a 100 per cent 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 him or on his behalf if-
* He is carrying on a trade when the expenditure is incurred and the R&D relates to that trade or,
* after incurring the expenditure he sets up and commences a trade connected with the R&D
Expenditure on research and development includes:
* expenditure incurred for carrying out research and development, and
* expenditure incurred for providing facilities for carrying out research and development.
Certain capital expenditure is excluded for RDA purposes such as expenditure 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 RDAs.
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. RDAs are a potentially valuable relief as since the abolition of industrial buildings allowances it is the only way you can claim capital allowances on a building (other than in respect of qualifying fixtures and integral features).
RDAs 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.
RDAs are only claimable up to two years following the end of the accounting period in which the capital expenditure was incurred and therefore it is important that qualifying expenditure is identified and claimed in good time.
For more information regarding how you can benefit from R&D tax relief or RDA’s please contact Aaron Hemmington at Hawsons Chartered Accountants on 01604 645600, email or visit www.hawsons.co.uk