In its continuing quest to create the most competitive tax system in the G20 the Government has published its consultation document on the introduction of an “above the line” (ATL) R&D tax credit for companies claiming under the large company R&D tax relief scheme.
The ATL has been identified by business as the best way of providing an enhanced take up of the scheme by increasing:
- Visibility – Those outside the tax department in large businesses will be more aware of the impact of claiming on their R&D cost base.
- Certainty – The ATL credit would provide more certainty over the timing and quantum of benefit, leading to more investment in R&D.
- Benefit to claimants with no tax liability – companies not paying corporation tax are currently effectively unable to benefit from the large company relief until they have taxable profits. A cash payment of the credit is proposed.
The aim of the consultation is to gather feedback from interested parties into the radical changes in the way that the R&D relief under the large company scheme is delivered, both in the way it is accounted for and the form of the relief itself.
Who will this affect?
The relief, to be implemented from 1 April 2013, will affect those larger companies who currently claim under the large company scheme which is mainly for companies with 500 or more employees and a turnover exceeding 100 Million Euros and/or an annual balance sheet total of 86 million Euros.
However it will also affect those SMEs who for one reason or another are unable to claim under the SME R&D tax relief scheme and have to claim under the large company scheme instead. Broadly speaking this includes companies who are controlled by larger groups or who are in receipt of Notified State Aid for an R&D project, or who perform R&D activities subcontracted into them.
The Government have stated that they do not intend to replace the current SME R&D tax credit with an ATL credit, and also that SME scheme benefits are not reduced as the result of the changes to be made.
Main features of the ATL credit
The basic model proposed is as follows:
The ATL credit will be calculated directly from eligible R&D revenue expenditure
The current adjustment to the company’s taxable profit will be replaced by a credit equal to a currently proposed rate of 9.1% against the R&D expenditure in the company’s profit and loss account. This credit will be subject to corporation tax in the normal way, leading to a net benefit approximately equal to the benefit under the existing scheme. This will lead to an increase in reported profits and effective tax rate when compared to the existing scheme. There would be no change to the definition of R&D for tax purposes of the manner of calculating the qualifying R&D expenditure.
The ATL credit will be payable in cash to companies with no corporation tax liabilities
This would be a major benefit to those companies in a tax loss situation. The current scheme usually means that the additional deductions generated under the relief are carried forward to be offset against future profits. The proposals envisage a cash payment in respect of the credit for companies without profits. A decision on whether a discount will apply to the payable credit will be taken following the consultation process.
The ATL credit will be taxable
It is proposed that there will be a minimum rate of credit of 9.1%, which, taking into account the corporation tax rates of 23% announced for the tax year beginning in April 2013, equates to the benefit that would be achieved under the current scheme. There is a stated benefit of having this higher “headline” rate, which is perceived by international investors to be important in making investment decisions in UK R&D.
The ATL credit will be administered and settled through the tax system
The tax system is already geared up to deliver the support, checks and balances and payment mechanisms required. Under the ATL credit the link between the value of the credit and the tax liability is weakened, a requirement in order to be able to account for it above the line. For a company with a taxable profit the credit would be set off against the tax liability calculated and the net paid to HMRC. For companies not paying tax the cash credit, discounted or not, would be paid net of tax to the company.
The above points are an overview of proposed scheme. The introduction of the ATL credit will require much fine tuning and the purpose of the consultation process is to enable interested parties to air their views about the potential impact and suggest changes where desired..
The consultation document asks for views on several areas such as the potential for:
- A reduced payable credit (e.g. 80% of the headline rate) in order to reduce the cost of implementation to the Government with the ability to claim the remainder for up to three years provided the company becomes tax paying.
- Group relief of the credits so that these can be used within groups in a tax efficient manner.
- Abuses of the relief – Responses are sought on how the credit could be designed to prevent tax avoidance opportunities including the artificial use of UK entities by overseas concerns and arrangements put in place to avoid any reduction in the credit if this were introduced.
This consultation process is the latest stage in the Government’s effort to listen to the views of business on how changes can be effected to the R&D tax relief system to enhance its attractiveness to companies wanting to perform R&D in the UK. Kingly Brookes welcomes the Government’s open dialogue and strategic aims. Any company affected by the changes should, at the very least, seek to understand the potential impact of these as the implementation date is only next year, and consider taking part in the consultation process.
As specialists in advising on R&D tax relief claims Kingly Brookes are taking an active part in this process. We will also be representing the views of our clients and contacts through our membership of the HMRC R&D Consultative Committee and our membership of the working group set up by HM Treasury to focus on the detailed issues resulting from the consultation exercise. We would be happy to meet with you to discuss any thoughts that you may wish to put forward as part of this process and to discuss the potential implications for your current claims. The closing date for responses is 29 June 2012.
Please do not hesitate to contact John Moore on 0207 292 8850 or at email@example.com if you would like to discuss this, or any other aspect of the R&D tax relief regime.
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.