For the past 15 months, the Annual Investment Allowance (AIA) has been set at a record high. First introduced in 2008, the AIA is currently set at £500,000, meaning that most SMEs receive a 100% deduction from taxable profits for their annual capital expenditure on plant and machinery. It is therefore little surprise that the proposed cut of the AIA to £25,000 from 1st January 2016 has caused murmurs of discontent throughout the business community.
To his credit, Chancellor George Osborne raised the issue during his 2015 Budget speech. The Chancellor acknowledged that a reduction to £25,000 would not be ‘remotely acceptable’ and would announce a revised rate in the coming months. Amongst the air of uncertainty, one thing is clear: the AIA will be cut, and more than likely, substantially so.
With the AIA currently at a historic high, there has been little incentive for many SMEs to claim the little known (and seldom claimed) Research and Development Allowance (RDA). At present, if an SME’s capital expenditure on plant and machinery is less than £500,000, a 100% first year allowance can be claimed on the whole amount.
RDAs provide a 100 per cent first year capital allowance for research and development (R&D) capital expenditure. RDAs can be claimed on
- buildings which have been constructed for R&D purposes (e.g. a laboratory),
- equipment which has been purchased to support the R&D function and
- IT systems which facilitate the R&D function.
The definition of R&D for the purposes of claiming RDAs is the same as the definition which governs R&D tax relief. It should also be noted that RDAs are completely separate from R&D tax relief (which is primarily concerned with revenue expenditure, not capital).
With the proposed reduction of the AIA, RDAs will become a much more relevant tax saving tool for UK entities undertaking R&D activities. The AIA can no longer be relied on as a ‘cover all’ pool for capital expenditure. Any expenditure over and above the (soon to be reduced) AIA limit is at risk of being written down at an annual rate of 18% – meaning that full relief will not be given until a 5 year period has elapsed.
If your client has incurred significant capital expense and ticks any of the following boxes, RDAs may become very relevant:
- Undertakes R&D activities
- Claims R&D tax relief
- Develops new products and processes to remain technically competitive
The proposed reduction in the AIA limit means advisers will have to be increasingly shrewd when preparing a capital allowance computation. RDAs are one such tool which may substantially reduce taxable profits and keep corporation tax liabilities low. From 1st January 2016, make sure that the question regarding RDAs is on your year-end client review checklist.
Author: Alison Lynch, Head of Abbey+
E mail: firstname.lastname@example.org