By Nigel Holmes, Senior Tax Specialist at Catax
This is a favourite topic of mine! Whilst we have all heard of Capital Allowances and Research & Development tax relief, many haven’t heard of RDAs. They used to be called Scientific Research Allowances and have been around long before R&D tax relief and long before me. 1962 to be precise!
So, what are they?
Well, they are a type of capital allowance, so a tax relief on fixed asset expenditure for assets used in R&D. Whereas the R&D tax relief relates to what is known as revenue costs such as staff costs, subcontractors, materials etc., the RDA relates to machinery, fixtures, equipment and buildings.
So how does this differ to normal plant and machinery allowances?
In many ways it doesn’t in that items may qualify as either. But some assets such as buildings won’t qualify as plant, yet can as an RDA.
What is the rate?
Like Annual Investment Allowance, it is 100% in the year of spend. Anything not claimed is lost unless it can be claimed as normal plant and machinery at the usual reducing balance rates of 8% or 18%. As with R&D tax relief, a claim can be made for up to two years from the end of an accounting period.
When would we claim?
There are really only two relevant circumstances.
The fixed asset spend in the period on plant and machinery items exceeds the AIA. Here we would claim AIA on non-R&D assets such as office furniture and RDA on items such as machinery to get the maximum relief in that period. You cannot claim RDA and AIA on the same amount. That would be 200% relief and would be greedy! Claiming RDA accelerates the tax relief rather than drip feeding the excess over the AIA at 8% or 18% for many years.
The fixed asset spend includes items that don’t qualify as plant and machinery such as a building (laboratory, factory etc) used in R&D. In this case this is relief that is on an asset that wouldn’t normally qualify for any tax relief so it is an absolute saving not just an accelerated relief. The cost of land is excluded.
Key points to note:
The definition of R&D is not as complex as for the relief we know and love, so our R&D clients with potential RDA claims should qualify.
The asset must be used for R&D when first brought into use. Subsequent changes (say from R&D to mass production) does not result in a clawback, but anti-avoidance rules would challenge an asset used just for a day to get the relief. It has to be sensible.
An asset used partially for R&D and partially for normal use at the outset can be pro-rata’d such that RDA is claimable on a just and reasonable proportion.
The proceeds generated from a subsequent sale of an RDA asset is taxed in the period of sale.
This relief sits so nicely with our R&D tax relief and Capital Allowances offerings. Also remember that for loss making companies the cash back generated from an R&D claim is based upon its tax losses. So an increased loss caused by an RDA claim and an R&D tax relief claim will increase the potential cash the claimant company can receive.