By Nigel Holmes, Senior Tax Specialist at Catax.
Research & Development (R&D) and Capital Allowances are two very separate tax reliefs and two different services that we offer, but what happens when a company makes an R&D tax relief claim and also carries out a Capital Allowance review of their commercial property at the same time?
Profitable company
As an increased claim to Capital Allowances and an R&D tax relief claim will each reduce a company’s taxable profits, the taxable profits are reduced by both claims, concurrently, in the trading profit adjustment, such that the revised Corporation Tax liability reflects both claims.
Loss-making company
Our normal advice is that a Capital Allowance review is only worthwhile where profits are being generated. However, where a company is loss-making and also making an R&D tax relief claim, a Capital Allowance claim alongside an R&D tax relief claim can, in fact, increase the amount of cash that HMRC will pay to the company on that R&D tax relief claim. This is best illustrated with an example:
Loss before R&D tax relief claim and Capital Allowance claim £10,000
R&D qualifying costs £50,000
Additional amount claimable as Capital Allowances in the period following review £20,000
The cash back looking at R&D tax relief only is the lower of:
In this case, £75,000 loss is surrendered in return for 14.5% cash from HMRC. £10,875 cash.
The cash back looking at R&D tax relief and Capital Allowances is the lower of:
In this case, £95,000 loss is surrendered in return for 14.5% cash from HMRC. £13,775 cash.
In other words, the Capital Allowance claim for a loss-making company carrying out R&D can be converted into cash too and the £20,000 Capital Allowance adjustment has generated a further £2,900!
Care has to be taken such that if the R&D uplifted cost exceeds the loss then the Capital Allowance claim will not create a cash repayment situation.
Here is the proof:
Loss before R&D tax relief claim and Capital Allowance claim £100,000
R&D qualifying costs £50,000
Additional amount claimable as Capital Allowances in the period following review £20,000
The cash back looking at R&D tax relief only is the lower of:
In this case, £115,000 loss is surrendered in return for 14.5% cash from HMRC. £16,675 cash. £50,000 loss remains to be carried forward.
The cash back looking at R&D tax relief and Capital Allowances is the lower of:
In this case, £115,000 loss is surrendered in return for 14.5% cash from HMRC. £16,675 cash. £70,000 loss remains to be carried forward.
So the repayment is the same regardless of the Capital Allowance review in this second example, and the Capital Allowances have increased the losses rather than create a cash repayment, something a client may be less enthusiastic about.
That said, it just shows that sometimes loss-making companies should look at a Capital Allowance review, and this also applies when looking to make claims for Research & Development Capital Allowances (RDA) too.