Following the consultation process, which we commented on in detail in our article on 29 March 2012, the Government have now published the draft legislation for inclusion in next year’s Finance Bill setting out how the latest addition to the raft of R&D tax relief incentives, the above the line (ATL) R&D tax credit, will work. This will affect both large companies and potentially some SMEs.
The new ATL credit will affect all companies who claim under the large company scheme. So this will be of interest to those SMEs who have to claim under the large company scheme because they perform subcontract R&D work or receive subsidies.
The credit will provide a mechanism for companies claiming under the large company scheme and not paying tax to obtain a fully payable tax credit, net of tax. Previously such companies were unable to obtain a repayment and could only carry forward the additional losses created by the claim process.
The repayable amount will be subject to a cap calculated by reference to the PAYE & NIC liabilities of the qualifying staffing costs.
Companies will be able to claim the ATL credit for their qualifying expenditure incurred on or after 1 April 2013.
The ATL credit will be available at the headline rate of 9.1% of the qualifying R&D expenditure for the period, (or 49% for oil and gas companies having a ring fence trade) and it will be taxable.
The ATL credit scheme will be optional initially. Companies that do not elect to claim relief under the scheme can continue to claim under the existing large company scheme for expenditure incurred up to 31 March 2016. From 1 April 2016 its use will be mandatory.
The scheme has been designed so that companies will be able to account for the ATL credit in the profit & loss account; “above the line”, thus reducing the cost of the R&D expense to the extent the expenditure qualifies.
The ATL credit, to the extent it is uncapped, can be surrendered as group relief or used to offset tax liabilities for other periods.
The calculations of the amount of qualifying R&D expenditure are unchanged from the existing rules applying to the large company scheme.
The proposed changes include amendments to the Patent Box regime to ensure that the credit does not reduce the amount that can be included in the calculation of the profits available for that tax relief.
The ATL credit will be administered and settled through the corporation tax system.
Under the current system companies claiming under the large company scheme obtain an additional tax deduction (“super deduction”) of 30% of the qualifying R&D costs. This super deduction is accounted for as a reduction of the tax charge in the accounts. If the company does not pay tax then, unlike the current scheme for SMEs, there is no repayable tax credit.
The consultation highlighted the desire of larger companies to be able to account for the R&D tax credit in such a way that it reduced the R&D charge in the profit & loss account. It was observed that more directly associating the reduction in the cost of the R&D, through the ability to be able to account for the credit above the line, rather than through the tax charge, would mean that the effect would be more visible to those actually carrying out the R&D stimulating an increase in the amount carried out.
For the first time companies with no liability to corporation tax claiming under the large company scheme will have the potential to obtain a payable tax credit rather than having to carry any additional losses generated forward for offset against future profits. The SME scheme has always afforded the potential for this benefit although until recently any repayment was subject to the PAYE & NIC cap.
What will have been a surprise to many is that the ATL credit has incorporated a similar cap mechanism. This is more restrictive in its application than the old SME cap as it caps the ATL credit at the amount of PAYE & NIC liabilities attributable to the staffing costs included in in calculating the qualifying R&D expenditure. The SME cap at least included the total PAYE & NIC liabilities of the company, not just those of the R&D staff. The reason for the imposition of the cap is stated as being to safeguard the scheme from abuse. In effect it ensures that a repayable credit claimant will have a substantial presence in the UK in the form of local staff. However there will be companies which have, for instance, a sizable proportion of their claim represented by the costs of say consumables or by externally provided workers, who may be adversely affected by the way the cap is currently designed. Amounts that exceed the cap are carried forward to be treated as R&D expenditure credit for the next accounting period.
Before being able to claim a payable tax credit the credit is first set off against any liability to pay tax for the current accounting period and then (subject to the cap) against the liability for any other accounting period. Only if there is any amount remaining, and the company does not elect to surrender part or all of it to a member of the group (if applicable) can the amount, net of tax at the main rate of tax applicable, be repaid to the company.
At the time of the consultation process the start date of the regime was for accounting periods starting after 1 April 2013. This would have had the effect of delaying the entry into the regime for many potential claimants. We are pleased that the Government has amended the start date to be for expenditure incurred on or after 1 April 2013.
Although respondents would have liked to have seen the headline rate of relief higher than the 9.1% currently proposed, this rate does at least preserve the existing tax benefit given under the large company regime. It is encouraging that the views of the oil & gas industry have been catered for, with a higher rate that again preserves the rate of relief that they currently enjoy. The Government have committed to keep the headline rate of ATL credit under review as part of its commitment to an internationally competitive tax system.
Companies had expressed concerns that there would be practical issues around the adoption of the ATL credit to be dealt with associated with lack of certainty over the claim outcomes combined with more attention on the claim figures once they were accounted for above the line. In addition those companies having UK Government contracts, especially those in the defence and pharmaceutical sectors, were concerned about the impact of the ATL credit on the pricing of the contracts. The Government have responded by designing the scheme such that the existing super deduction relief will run alongside the ATL credit and companies may choose which one to use until 1 April 2016. However once a company has elected to use the new ATL credit it will not be able to claim under the pre-existing large company scheme.
We are pleased that The Government has listened to the views of interested parties in designing this new R&D tax relief. We think that the new regime demonstrates a continuing commitment to the encouragement of R&D activities in the UK, especially when combined with the forthcoming Patent Box relief regime. The earlier start date of 1 April 2013 will enable the benefits to be felt much sooner than was originally suggested. SMEs currently having to claim under the large company scheme will now potentially be able to access a repayable credit. Large companies without a corporation tax liability will now be able to take advantage of the potential cash flow benefits that will stimulate increased spending on R&D in the UK in a competitive world market.
Please do not hesitate to contact John Moore on 0207 292 8850 or email@example.com if you would like to discuss the implications of this for your company.
This briefing is prepared by Kingly Brookes LLP, a limited liability partnership. For further information on any of the material contained in or referred to in the briefing, please contact us. This briefing note is intended to keep our readers up to date with the developments in this area, but it is a general guide only and is not intended to be a comprehensive statement of the law and practice in this area. No liability is accepted for the opinions it contains or for any errors or omissions.