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Tax relief for capital expenditure on research facilities

Gemma Brindley, Director, Corporation Tax
11/11/2019
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When businesses carry on research and development (R&D), and spend large amounts of capital expenditure on research facilities, they cannot claim R&D tax benefits on this type of expenditure because R&D tax benefits are only available on revenue expenditure. Instead, they can claim capital allowances. 

There are a number of different rates of capital allowances that apply to capital expenditure. These depend on what the expenditure is used for, and if it is to finance the cost of a building, the extent to which the building is used for R&D purposes.

The different rates are as follows:

  • Plant and Machinery Writing Down Allowances
  • Plant and Machinery Integral Features
  • Annual Investment Allowance (AIA)
  • Research and Development Allowance (RDA)
  • Structures and Buildings Allowance (SBA)

18%
6%
100%
100%
2%

The AIA is currently £1 million per year. If this limit is exceeded then it may be possible to claim RDAs on expenditure in excess of £1 million. RDAs are available on expenditure relating to assets used for R&D purposes, or on providing facilities for carrying out R&D. So, if a company is taking a risk by developing new products, processes, materials, or services (or improving existing ones), RDAs may be available on relevant capital expenditure.

 

Case Study

 

Research Limited makes an annual R&D claim. Due to business growth over the past few years, the company requires increased space to better facilitate new product development. It has therefore decided to move premises.

The Finance Director asked what capital allowances are available on the £2 million planned spend on the new premises.

Facts
The building will cost £1.2 million and altering and extending the building a further £500,000. The cost of fitting out the new premises will cost £300,000, of which £250,000 qualifies for capital allowances. The company has also budgeted to spend a further £500,000 on office equipment and computers in the year.

  Tax relief on capital expenditure if no tax review is undertaken
Fitting out costs (AIA)
Spend on office equipment / computers (AIA)
Expenditure on which capital allowances can be claimed:     
Tax saving at 19%

£250,000 
£500,000
£750,000
£142,500
 

Tax relief on capital expenditure if a tax review is not undertaken.

The tax saving could be increased significantly if a detailed tax review is carried out.

We have ignored for the purpose of this example any possible claim of the SBAs, which are broadly available on certain post 29 October 2018 construction costs.

The detailed review shows that an additional £200,000 of the cost of fitting out the new building will qualify for capital allowances. Also, £400,000 of the alterations and extension costs relate to the new R&D facilities.

 

Expenditure on which tax relief can be claimed increases to the following:
Fitting out costs (AIA)       
Spend on office equipment / computers (AIA)    
Additional fit out costs identified from the review (AIA)            
Alterations and extension relating to the R&D facility (RDA)                  
Expenditure on which tax relief can be claimed:         
Tax saving at 19%                                    


£250,000 
£500,000
£200,000  
£400,000 
£1,350,000 
£256,500 
  The review has saved Research Ltd a further £114,000 in tax. This is due in part to expenditure on fitting out costs that are eligible for capital allowances and partly due to the availability of RDAs on capital expenditure used for R&D purposes
   

 

Moving premises is an expensive process, so it can be well worth reviewing the costs in detail in order to maximise the available capital allowances and mitigate the net cost of the new premises.

Please contact Gemma for any further information or if you would like to discuss this further.

Contact us

Gemma Brindley
Gemma Brindley
Director, Corporate Tax
Cheltenham