RDAs Explained

The UK government currently offers businesses two types of incentives to do Research & Development (R&D): 

• R&D tax relief (which includes a tax deduction or R&D tax credits), and 
• Research and Development Allowances (RDAs).

While much of the focus in our blogs has been on R&D tax credits, it’s important to discuss the value of the often overlooked RDAs and how, when combined with R&D tax credits, they can offer significant savings.

What are RDAs?

RDAs are a specific form of capital allowance for research and development capital expenditure. UK businesses qualify for a 100% tax deduction on these expenses in the year they’re incurred and there’s no limit on the amount that can be claimed. The total qualifying costs are deducted from your client’s taxable profits, reducing the company’s corporation tax.

Other types of capital allowances

There are a few types of capital allowances that provide tax relief for UK businesses. For each, a set number of conditions must be met before a business can claim tax relief. In addition, each type of capital allowance qualifies for tax deductions at differing rates. For example, Plant and Machinery Allowances (PMAs) allow for an 18% deduction each year. 

Then there’s the Annual Investment Allowance (AIA), which was introduced in 2008 to stimulate economic growth in the wake of the financial crisis. The AIA allows UK businesses to deduct the costs of purchasing equipment from their taxable profits. Currently, the limit on the amount of qualifying capital expenditure that can be used for the allowance is the highest it’s ever been at £1m. The government’s 2021 Budget and Spending Review recently announced this limit would be extended until April 2023. 

The main differences between RDAs and AIAs are as follows:

• Limits to the amount businesses can claim: With AIAs, there’s a limit to the amount of tax relief companies can claim; with RDAs, there isn’t. 
• The types of expenditure claimable: While AIAs include plant and machinery, office equipment and fixtures, RDAs offer a wider range of qualifying expenditure. We go into further detail in the paragraph below, but it includes many capital expenses related to R&D, with the exception of land and intellectual property. 

All capital allowances, including PMAs, AIAs and RDAs, are claimed on your client’s tax return. 

What expenditure can your clients claim for RDAs?

According to the HMRC Capital Allowances Manual, qualifying expenditure is capital expenditure that a trader incurs on R&D directly undertaken by the trader or on the trader’s behalf provided that:

• the R&D is related to a trade that the trader carries on; or
• the trader sets up and commences a trade connected with the research and development.

Examples of capital expenditure that qualify for RDAs include:

• Building facilities for R&D. For example, a building that features an R&D centre will qualify for capital allowances if the R&D facility makes up at least 75% of the building’s total cost.
• Laboratory equipment.
• Plant and machinery (P&M).
• Company vehicles for staff working on R&D projects.
• Any equipment, IT systems, or facilities that have specifically been purchased for the purposes of R&D.

Example calculation for RDAs

To illustrate how much your client can benefit from RDAs, let’s use the example of a business that’s just invested in upgrading the space in which they run their R&D operations.

Capital allowances without RDAs

The total deduction here is the AIA and the PMA added together, which equates to £1,045,000. With corporation tax at 19%, this translates into an overall tax saving of £198,550.

Capital allowances with the inclusion of RDAs

With RDA included, the business benefited from a more significant tax deduction (£1,500,000). This translates into a tax saving of £285,000 and, therefore, an additional benefit of £86,450.

How do RDAs complement R&D tax credits?

It’s important to be aware of how RDAs differ from R&D tax relief and how the two incentives can interact to benefit your clients’ businesses.

As we’ve explained above and in previous blogs, RDAs relate to expenditure on fixed assets, while R&D tax credits relate to operational costs, namely contracting, materials, and staff costs.  

HMRC is consistent in its definition of R&D across the RDA and R&D tax relief schemes. If your clients’ R&D projects fit this definition, they’re likely to qualify for the benefits of both. Note, however, that businesses only qualify for RDAs if they’ve invested in capital assets in their pursuit of R&D. Your clients also cannot claim R&D tax credits and RDAs on the same expenditure.

When used together, R&D tax credits and RDAs can help your clients generate a scalable R&D benefit that boosts their cash flow. RDAs share a similar claims schedule with R&D tax relief, so it’s usually best to claim for both at the same time.

Let’s look at an example of how a business can benefit from using both schemes:

As in the earlier example, this hypothetical company is expanding its existing, dedicated R&D building. They’ve acquired £300,000 through successful R&D tax credit claims, and they’re now constructing a new research facility. 

The total investment is broken down as follows:

• £150,000 for construction work
• £150,000 for equipment
• £70,000 for labour

As mentioned before, building costs don’t qualify for capital allowances. However, the equipment costs can be deducted in full using the AIA. 

If the business consulted an R&D tax specialist, they would have realised that part of the build-costs could be eligible for RDAs , as the building is going to be used for this purpose. As a result, an additional £50,000 of these costs can now be deducted,  creating a further tax saving of £9,500. 

According to the business’s R&D tax advisor, the labour costs involved in setting up and checking the equipment will qualify for R&D tax credits. . The R&D tax relief for the labour costs incurred can grant an additional benefit of at least £17,290. Wages for staff working on R&D projects don’t count as an RDA, so R&D tax credits help fill this gap. 

Due to the varied nature of most businesses’ capital expenditure, your clients’ capital expenses are likely to fall into more than one category. If you know what to claim for, as well as how R&D tax credits and RDAs can complement each other, you can help the SMEs in your care to maximise their claims.

Get in touch with made.simplr

With the help of specialised R&D tax credit software, you can easily maximise your clients’ claims. Our software is fully integrated with Xero accounting, making it simple to connect your clients’ financial data and add an R&D-related claim. This increased efficiency and organisation can help your client scale their R&D practices, thus allowing more capital assets to be brought into future AIA and RDA claims.

Ready to get started? Book a demo today!