R&D Tax Credits under the Merged Scheme apply to accounting periods starting on or after 1 April 2024. Capital Allowances apply to qualifying capital expenditure on plant and machinery under Part 2 of the Capital Allowances Act 2001. Both can apply to the same accounting period and to the same company. The rules governing each are separate: HMRC's CIRD manual governs R&D relief; HMRC's Capital Allowances manual (CA) governs Capital Allowances. The interaction requires deliberate calculation, not an assumption that one excludes the other.
What each relief covers
R&D Tax Credits (Merged Scheme): A 20% above-the-line credit on qualifying R&D expenditure. Qualifying categories include staff costs, externally provided workers, subcontractors, consumables, software licences, cloud computing costs, and capital expenditure on assets used directly in qualifying R&D. For loss-making companies that meet the ERIS threshold, the rate is 27%. The credit feeds into the CT600 and can be surrendered for a cash repayment if the company is in a loss position or has insufficient corporation tax liability.
Capital Allowances: A deduction against taxable profits for the cost of qualifying plant and machinery. The three main routes are: the Annual Investment Allowance (AIA, up to £1 million per year on most plant and machinery), Full Expensing (100% first-year allowance on main-rate assets, 50% on special-rate assets, from April 2023 onward and made permanent), and Writing Down Allowances (18% per year on main pool, 6% on special rate pool) for assets not covered by AIA or Full Expensing. Land Remediation Relief and Structures and Buildings Allowance are separate Capital Allowances-adjacent reliefs with different rules.
At a glance
| Criterion | R&D Tax Credits (Merged Scheme) | Capital Allowances |
|---|---|---|
| What it covers | Qualifying R&D expenditure: staff, EPWs, contractors, consumables, software, cloud, R&D capital | Qualifying plant and machinery: equipment, fixtures, integral features |
| Relief mechanism | Above-the-line credit (20% or 27%) on qualifying spend | Deduction against taxable profits (100% AIA/FE, or WDA rates) |
| When claimed | Retrospectively, in CT600 after period ends | Retrospectively, in CT600 after period ends |
| Eligibility condition | Expenditure must qualify under CIRD criteria (advance, uncertainty, direct connection) | Asset must be qualifying plant and machinery; not land or buildings in general |
| Can they stack on same asset? | Yes, in principle | Yes, in principle |
| Typical SME value | £10,000 to £500,000 depending on qualifying spend | £5,000 to £250,000 depending on capital spend and profit position |
| Adviser required? | Technically self-assessed; specialist materially improves quality | Technically self-assessed; surveyor materially improves coverage |
Stacking on the same asset
The most common stacking scenario: a manufacturing or engineering SME purchases a piece of equipment that is used in qualifying R&D work. For example, a contract manufacturer purchases a CNC machine for £120,000. The machine is used 60% for R&D projects and 40% for commercial production runs.
Capital Allowances: the full £120,000 qualifies for the Annual Investment Allowance (assuming the company is within the £1 million AIA threshold). The company claims 100% of the cost in the year of purchase, giving a tax deduction of £120,000 against trading profits. At a 25% corporation tax rate, this is a cash tax saving of £30,000.
R&D Tax Credits: the qualifying fraction of the machine's cost attributable to R&D use may be included in the qualifying capital expenditure for the Merged Scheme claim. At 60% R&D use, the qualifying R&D capital element is £72,000. At the 20% Merged Scheme credit rate, this generates a credit of £14,400. The credit is above-the-line and reduces the corporation tax liability directly.
These two calculations operate in parallel. Claiming the AIA does not reduce the qualifying R&D capital expenditure figure. The company receives both the Capital Allowances deduction and the R&D credit on overlapping costs. The total tax benefit from the machine is £30,000 (Capital Allowances) plus £14,400 (R&D credit) = £44,400, on a £120,000 spend. This represents a 37% tax recovery on a single capital purchase, which is substantially better than either relief in isolation.
Where the rules diverge
Not all capital expenditure qualifies for R&D capital relief. The key condition: the asset must be used directly in carrying out qualifying R&D. An asset used for administration, commercial production, or general operations does not qualify for R&D capital relief, even if the company has a valid Capital Allowances claim on the full cost.
For buildings and structures, the picture is more restricted. Capital Allowances on buildings are limited to the Structures and Buildings Allowance (SBA) at 3% per year straight-line and do not include the full acquisition cost of commercial property. R&D capital relief does not extend to buildings used in R&D in the general sense; it focuses on equipment, apparatus, and similar assets.
Conversely, some R&D qualifying expenditure categories have no Capital Allowances equivalent. Staff costs are the largest example: wages, employer's NIC, and pension contributions attributable to qualifying R&D work are fully included in the R&D claim but are revenue expenditure, not capital. There is no Capital Allowances claim on staff costs. The R&D claim here operates independently, not in competition with Capital Allowances.
Full Expensing and R&D in 2026
Full Expensing, confirmed permanent in the 2023 Autumn Statement, changed the Capital Allowances calculation for most plant purchases above the AIA threshold. Previously, assets above the AIA limit were subject to Writing Down Allowances at 18 percent per year on the main pool (dropping to 14 percent for company accounting periods beginning on or after 1 April 2026 per Autumn Budget 2025), and 6 percent per year on the special rate pool. Full Expensing removes that constraint for main-rate assets.
For an SME spending heavily on equipment, Full Expensing means the full capital cost hits the P&L (for tax purposes) in year one. For a profitable company, this generates an immediate tax reduction. For a loss-making company, it increases the loss and, combined with R&D Tax Credits on the qualifying fraction of the same spend, could produce both a carried-forward loss and an R&D cash repayment in the same period.
The practical planning point: if your company is borderline between profit and loss in a period where it has both material capital expenditure and R&D activity, the interaction of Full Expensing and R&D credits on the same capital spend can shift you from a tax-paying position to a repayment position. This is worth modelling with a specialist before the CT600 deadline, not after it.
Land Remediation Relief
Land Remediation Relief (LRR) is a separate but related Capital Allowances-adjacent relief for the cost of remediating contaminated or derelict land. It provides a 150% deduction on qualifying remediation costs (or a 16% cash credit for loss-making companies). LRR does not interact directly with R&D Tax Credits because the qualifying criteria are entirely different. However, a company with both R&D activity and a contaminated land acquisition in the same period may have claims under both reliefs in the same CT600. Uplift Tax assesses all three reliefs (R&D, Capital Allowances, and LRR) in a single free assessment. See how it works for details.
When to choose which
The framing of "choosing" between R&D Tax Credits and Capital Allowances is usually wrong. The right question is: which reliefs does this company qualify for in this period, and are all of them being calculated correctly?
Capital Allowances apply whenever you buy qualifying plant and machinery. If you have bought equipment in the period, you have a Capital Allowances claim. R&D Tax Credits apply whenever you have qualifying R&D expenditure. If you have had staff working on advancing science or technology in the period, you may have an R&D claim. The two conditions can coexist.
The mistake to avoid is instructing your accountant to handle one and assuming the other is covered. The same accounting engagement rarely covers both optimally. Use the eligibility checker to get a sense of both positions, then request a free assessment to confirm. Read the qualifying expenditure guide for the full scope of what counts under the R&D Merged Scheme. For the relationship between R&D credits and grants, see the companion guide on R&D Tax Credits vs Innovate UK Grants.