R&D tax credits are a tax relief for companies undertaking R&D. Separate rules deal with claims by small and medium-sized companies (SMEs) and claims by large companies.
Under the current system, R&D relief for large companies is a ‘superdeduction’ of 130% of qualifying expenses, which reduces taxable profits. The SME scheme also enables SMEs to claim a payable R&D tax credit where the relief cannot be offset against the company’s corporation tax bill, for example due to losses. This is currently not available for large companies.
The 'above the line' (ATL) credit will instead be calculated directly as a percentage of the company’s R&D spend. The ATL credit will be able to be recorded in companies’ accounts as a reduction in the cost of R&D – that is ‘above’ the tax line.
The new ATL credit will be available at a headline rate of 9.1%. It will be taxable and will be fully payable, net of tax, to companies with no corporation tax liability. The Treasury said that this will ensure that "profit makers and loss makers are treated equally in terms of the benefit they derive from the relief".
Where a credit is paid to a company rather than set against its corporation tax liability, tax will be withheld at the main rate of corporation tax. This withheld tax will be available to be carried forward to set against any future corporation tax liabilities of the company.
Groups will be able to surrender the ATL credit to set against the corporation tax liability of a group member or surrender the tax withheld on a payable credit to set against the corporation tax liability of a group member.
In order to "safeguard the ATL credit scheme from abuse" the amount of payable credit will be limited to the amount of a company’s PAYE/NICs liabilities in relation to staff engaged in qualifying R&D activities in the accounting period.
It was originally intended that the new credit would be available for accounting periods beginning on or after 1 April 2013. It has now been announced that it will be available in respect of expenditure after this date. The Treasury says this "will allow companies to realise the benefits of the ATL credit sooner and will ensure that companies are not disadvantaged by the timing of their accounting period."
Companies will be able to elect to claim R&D relief by way of the ATL credit at the end of their accounting period. However, once a company has elected to claim the ATL credit, it will not be able to claim the relief as a super-deduction in subsequent accounting periods. Companies that do not elect for the ATL credit will be able to get the super-deduction until April 2016
The response to the consultation states that the main concerns raised about an ATL credit were in relation to contracts in the defence sector. Respondents pointed out that, unlike the existing super-deduction, the Ministry of Defence (MoD) would look to claw back the ATL credit in the pricing of its non-competitive R&D contracts. Foreign government departments, such as the US Department of Defence, would probably take a similar approach.
The Treasury states that the existing super deduction will not be retained as an alternative beyond 2016. The response document states that "the treatment of R&D tax relief in the pricing of MoD single-source contracts is a matter of procurement policy and should be reviewed on its merits as part of the MoD’s response to the Currie Review".
It states that the Single-Source Regulations Office (SSRO), which is an independent body tasked with amending and overseeing single-source pricing regulations, is due to be set up in 2014-15. "Following consultation with MoD and industry, the SSRO will make a recommendation on the ‘fair and reasonable’ treatment of R&D relief in the pricing of MoD single-source contracts. In making this recommendation, the SSRO will consider the implications for levels of R&D investment in the UK defence sector." says the Treasury. It says that consequential amendments to the single-source pricing regulations would take effect "from April 2016 at the earliest."
"For the majority of companies undertaking R&D, the ATL credit is good news", says Ian Hyde a tax expert at Pinsent Masons, the law firm behind Out-law.com, "but for those involved in cost-plus contracting, for example in the defence industry, the ATL credit will reduce the “cost” element and so reduce the price payable. It is good that the Government has recognised the issue in relation to MOD contracts but it remains to be seen what “fair and reasonable” means. In any event, those contracting with foreign governments or outside of the defence industry should review their contracts".
In a consultation published in 2011, the Government asked for views on moving to an ATL credit. Following this consultation, the Government announced at the 2011 Autumn Statement that it would introduce an ATL credit for large company R&D investment in April 2013. At Budget 2012, the Government announced that the credit would be taxable, available at a minimum pre-tax rate of 9.1 per cent, and payable to companies with no corporation tax liability.
A consultation on the ATL credit’s detailed design and implementation was published on 31 March 2012.
The UK's new patent box regime for the taxation of intellectual property comes into force from 1 April 2013. Companies liable to UK tax can elect for their profits earned after 1 April 2013 from their patented inventions (and certain other innovations) to be taxed at a lower level of corporation tax. The relief is to be phased in over 4 years leading to a tax rate of 10 per cent by 1 April 2017.