Research and development allowances, usually shortened to RDAs, are a 100% capital allowance for capital expenditure on R&D. They sit in Part 6 of the Capital Allowances Act 2001, entirely separate from the merged R&D expenditure credit and ERIS, and they exist because those reliefs only reach revenue spending. HMRC’s manual states the boundary in one line: capital expenditure is excluded from R&D tax relief, but it may qualify for R&D allowances. So the rig, the test equipment, the pilot plant and the laboratory building are outside your R&D credit claim, and inside a code that writes the whole cost off against profits in the period it is incurred rather than over decades.
What RDAs cover
Two kinds of spending qualify: capital expenditure incurred for carrying out research and development, and capital expenditure incurred for providing facilities for carrying out research and development. The second limb is wider than it reads — it takes in the assets and buildings used by the people doing the work.
Section 439 of the Capital Allowances Act 2001 sets the conditions. The spend must be capital expenditure incurred by a person on R&D directly undertaken by that person or on their behalf, and either the person carries on a trade when it is incurred and the R&D relates to that trade, or, after incurring it, the person sets up and commences a trade connected with the R&D. The same expenditure cannot be taken into account for more than one trade, and where only part qualifies it is apportioned on a just and reasonable basis.
R&D means the same thing here as for the credit. Section 437 defines it by reference to normal accounting practice and the Secretary of State’s Guidelines — the same Guidelines that decide whether a project qualifies for R&D tax relief. One addition: oil and gas exploration and appraisal is expressly within the RDA definition.
RDAs go to traders. HMRC states the limit the other way round: a person carrying on a profession or vocation is not entitled to them.
What RDAs do not cover
Land is out. No allowances are due for expenditure on the acquisition of, or of rights in or over, land, so buying a site with a research building on it means apportioning the price between land and building. The building is not out, and how you come by it does not matter: build a new R&D facility and the construction cost qualifies in full.
Rights are out. Expenditure on acquiring rights in research and development, or rights arising out of research and development, is not expenditure on research and development. Buying in a patent or a licence is not an RDA — patent rights have their own allowances under Part 8.
Dwellings are out, with one relieving rule. Where part of a building is a dwelling and the rest is used for R&D, and no more than a quarter of the capital expenditure on the whole building is referable to the dwelling, the whole building is treated as used for R&D. Other mixed-use buildings are apportioned between R&D and other uses in a just and reasonable manner.
The 100%, and what happens afterwards
The allowance is normally 100% of the qualifying expenditure, reduced by any disposal value that has to be brought into account for the period. It is given for the chargeable period in which the expenditure is incurred, or, where the spend came before the trade began, for the period in which the trade begins.
You can take less. Section 441 lets a person claiming the allowance require it to be reduced to a specified amount — but HMRC is blunt about the consequence: if a reduced amount is claimed, the balance cannot be claimed later. It is gone, not deferred, so the disclaimer is a decision to take deliberately rather than a default when profits are low.
There are no balancing allowances for RDAs. There are balancing charges, and the disclaimer above changes how they bite. Any part of the 100% allowance you did not claim shelters the proceeds first: on a sale, demolition or destruction, a charge arises only to the extent the disposal value exceeds that unclaimed amount, and it is then capped at the allowance you actually claimed. HMRC’s own example: £1 million spent on a laboratory, £750,000 claimed and £250,000 left unclaimed; a sale three years later for £1.25 million exceeds the unclaimed amount by £1 million, but the charge is £750,000, because it cannot exceed the allowance made. A change in the use of the asset does not trigger one.
Set that against the alternative. Structures and buildings allowance runs at 3% a year over an allowance period of 33 and one-third years, and cannot be claimed on costs already used for another allowance. A building relieved in full in year one is a different cash position from the same building written down at 3%.
Where RDAs sit against an R&D tax credit claim
The dividing line is capital or revenue for tax purposes, and HMRC is clear that the accounting treatment is not conclusive — expenditure written off immediately, or capitalised on the balance sheet, can still be characterised the other way for tax.
The two claims run on separate tracks and the same pound cannot do both jobs. What qualifies for R&D tax credits sets out the six revenue categories the credit allows, and which costs qualify goes through them one by one, including the capital exclusion. Everything the credit turns away for being capital is worth testing against Part 6 before it is written off as unrelieved.
RDAs are claimed as a capital allowance through the company tax return, and the claim can be made, amended or withdrawn up to twelve months after the filing date for that return — about two years after the period end.
Where we prepare an R&D claim, we tell you what we have had to exclude as capital, so it can be picked up on the capital allowances side rather than dropped between two advisers. If you want that boundary looked at for your own period, ask us.
Sources
- CIRD81700: capital expenditure — “Capital expenditure is therefore excluded; it may however qualify for R&D allowances”, with the cross-reference to the Capital Allowances Manual at CA60000 onwards, and the point that the accounts treatment is not conclusive of whether expenditure is revenue or capital for tax purposes.
- CA60100: RDA outline — “The allowances are very generous because the rate is 100%”; “RDA is only available to traders. A person carrying on a profession or vocation is not entitled to them”; and the balancing charge on sale, demolition or destruction but not on a change of use.
- CA60200: meaning of research and development — the definition at CAA01/s437(2) and (3), by reference to normal accounting practice and the Secretary of State’s Guidelines, and the express inclusion of oil and gas exploration and appraisal.
- CA60300: expenditure on research and development — expenditure incurred for carrying out R&D and for providing facilities for carrying out R&D; “expenditure incurred on acquiring rights in research and development or rights arising out of research and development is not expenditure on research and development”; the rule treating the whole building as used for R&D where no more than a quarter of the capital expenditure on it is referable to a dwelling; and just and reasonable apportionment of mixed-use buildings.
- CA60400: qualifying expenditure — “No allowances are due for expenditure on the acquisition of, or of rights in or over, land”, and the requirement that the expenditure relates to a trade carried on or a trade set up and commenced after the expenditure.
- Section 439, Capital Allowances Act 2001 — capital expenditure on R&D directly undertaken by the person or on their behalf; the trade condition and the setting-up condition; that the same expenditure may not be taken into account for more than one trade; and just and reasonable apportionment.
- CA60500: allowances and charges — “Normally RDA is 100% of the qualifying expenditure”, reduced by any disposal value; the chargeable period for which it is given, including pre-trading expenditure relieved in the period the trade begins; “A person does not need to claim the full 100% RDA but if a reduced amount is claimed the balance cannot be claimed later”; and that there are no balancing allowances for RDA.
- Section 441, Capital Allowances Act 2001 — the allowance equal to the qualifying expenditure, or the excess of that expenditure over any disposal value; the chargeable period in which the expenditure is incurred, or in which the trade begins; and that a person claiming the allowance may require it to be reduced to a specified amount.
- Claiming capital allowances for structures and buildings — the 3% rate from April 2020, the allowance period of 33 and one-third years, and that you cannot claim on costs already used to claim another allowance.
- CA11140: claims — time limits — “A capital allowance claim for an accounting period may be made, amended or withdrawn at any time up to 12 months after the filing date for the company tax return for the accounting period”, under FA98/SCH18/PARA82.
This page describes the rules as they stood at the review date above, as general information rather than advice on your circumstances. For how that distinction works, see our terms; for an answer on your own facts, talk to us.