Above the line R&D Tax credits – Finance Bill update

John Moore, March 28th, 2013

The Finance (No.2) Bill was published on 28 March 2013. This legislation, which will pass through the legislative process, will together with any amendments, become law in the summer of 2013 on receipt of Royal Assent.

We have previously set out our analysis of the way in which the draft legislation for the R&D expenditure credits (ATL) will work in our article of 13 December 2012.

The purpose of this update is to highlight the changes to that earlier draft legislation and the changes announced on budget day.

As previously reported in the budget day update on the ATL the Chancellor announced that the originally planned rate of 9.1% of the qualifying expenditure set out in the draft Finance Bill 2013 will be increased to 10%. Previously the rate had been set at 9.1% in order to give approximately the same benefit as currently given under the large company scheme at the tax rates in place for the year ended 31 March 2013. With the announced reduction in the corporation tax rates in future years the increase to 10% will increase the financial value of the relief.

The Government have responded to representations made as part of the consultation process concerning the potentially restrictive application of the PAYE & NIC cap to the calculation of the payable tax credit where a company has no corporation tax liability. Originally the cap was calculated using the PAYE & NICs of only those staff costs that qualified as part of the R&D claim. The draft legislation now brings into the cap calculation all the PAYE & NICs payable on the staff that are directly and actively engaged in the R&D, regardless of whether they are wholly or partly engaged in the R&D.

In addition, again in response to consultation representations, the cap amount now includes the PAYE & NICs of any externally provided workers supplied by a group company to the extent that they are included in the R&D claim.

Respondents had been concerned that, unlike the old SME cap, which included the whole PAYE & NICs amounts for the company, the previous draft was unduly restricting the availability of the payable credit. This was especially so for those companies that have fewer employee staff costs and higher amounts of consumables or externally provided workers. The modifications now announced go some way to addressing these concerns with the inclusion of group company EPWs, but fall short of fully addressing the concerns in this area. SMEs having to claim under the large company scheme may still be disadvantaged, as they will tend to have more subcontract and consumables costs compared to staff costs and less likelihood of being able to use group companies externally provided workers.

Again in response to consultation concerns the legislation now allows the PAYE & NICs associated with bonuses paid after the accounting period end to be included in the cap.

Also introduced was legislation to allow insurance companies to continue benefitting from R&D relief under an ATL credit.

Companies will be able to claim the ATL credit for their qualifying expenditure incurred on or after 1 April 2013.

The ATL scheme is optional until it becomes mandatory on 1 April 2016. In the meantime companies will be able to choose whether they claim under the existing R&D tax relief scheme for large companies, or under the ATL relief.

Our view

These revisions to the draft legislation released in December 2012 are welcome, increasing the benefits that can be enjoyed for qualifying companies. They demonstrate that the Government is willing to listen to the concerns of interested parties in making sure that the relief is properly targeted however seeking to maintain an appropriate balance between achieving the strategic aims of encouraging more innovation in the UK and the costs of providing such benefits.

Please do not hesitate to contact John Moore on 0207 292 8850 or at john.moore@kinglybrookesllp.co.uk 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.