What are capital allowances and R&D tax credits and how could they benefit your business?

Firstly, a brief introduction. Capital allowances and Research and Development (R&D) tax credits are forms of tax relief available to UK-based companies.

Capital allowances, to the unfamiliar, are offset against corporate or income tax and you’re able to claim them in a number of different scenarios, against various costs or asset purchases.

Among others; here are some of the things you can claim capital allowances on:

  • Plant and machinery
  • Renovating business premises
  • The extraction of minerals
  • Intellectual property
  • Furnished holiday letting businesses, can claim against items in residential properties

To calculate capital allowances, you need to use the value of the item in most cases, however, for certain items, you might need to use the expected selling price instead.

For more information on capital allowances, click here.

Capital allowances and research and development tax credits

The Research and Development Allowance (RDA) is the allowance formerly known as the scientific research allowance which offers relief for expenditure on research and development undertaken by a trader (you), but only if the R&D is related to the field within which your company trades. It’s a very generous allowance, 100% to be precise, so it’s certainly something to consider. Be aware; there will be a balancing charge if qualifying assets are subsequently sold, demolished or destroyed, however, not if the usage of the said asset changes.

To qualify for R&D tax credits:

  • The research and development needs to be related to the trade that you undertake OR you need to set up and commence trade that is connected with the research and development
  • Any research and development should show clear signs of leading to a potential extension of the trade undertaken by you. What this effectively means is that it will allow you to trade more

Essentially, you have to be sure that there is a fairly clear and obvious link between your company and the research you are undertaking to be in a position to apply for R&D tax credits. You may not need to be directly undertaking the research yourself; however, if it isn’t you undertaking it, then it must be conducted through an agency or a similar agreement.

It’s important to note that if you do not claim 100% of your RDA, the balance can’t be claimed at a later date.

For more information on R&D tax credits, click here.

If you don’t qualify for either allowance, but are keen to source finance for your business, click here to read our blog on 7 types of funding for SMEs and trends in lending.

If you’ve applied for finance through an alternative method, but you’ve unfortunately had your application rejected for whatever reason, then click here to read our blog on what do if you’ve been refused business credit.

If you haven’t already, it’s probably a good idea to check your business credit score before you apply for any form of business finance, so that you can be confident when approaching lenders that your business is seen in the best possible light. Find out more about how we can help you here.