Government announces R&D tax credit changes and consultation on 'above the line' credit

Increases in additional deductions for SMEs were announced but an 'above the line' tax credit which would benefit larger companies was not announced and will be the subject of further consultation.

"The policy objective is to improve the overall competitiveness of the UK tax system for R&D companies by increasing the incentive for them to carry out R&D, increasing R&D and innovation in the UK," said a Government statement. "The aim is to make the UK a preferred location for companies to carry out R&D and boost productivity and growth."

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.

Enhanced tax relief is already available in certain circumstances for expenditure by companies on R&D but 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 Government announced that legislation will be introduced in the Finance Bill 2012 to increase the additional deduction for SMEs to 125% of qualifying R&D expenditure for expenditure incurred on or after 1 April 2012. To allow for the increase, however, the rate of the payable SME R&D tax credit will be reduced to 11% and vaccine research relief will be abolished for expenditure incurred on or after 1 April 2012.

Legislation will also be introduced in Finance Bill 2012 to abolish the rule limiting an SME's payable R&D tax credit to the amount of PAYE and national insurance contributions it pays; to  remove the £10,000 minimum expenditure condition for all companies; to simplify the rules defining an externally provided worker to allow for cases where additional parties are involved in providing workers, and to clarify that where a company is in administration or liquidation it is not a 'going concern' and is excluded from relief.

The Government also published a report of its responses to the R&D consultation held over the summer.

"By far the most significant response from large companies to the consultation was the proposal to move from the current superdeduction to a system which reduced the company’s final tax liability rather than its taxable profits," said the report. This is commonly referred to as an ‘above the line’ tax credit system.

To be able to account for the credit ‘above the line’ the advice from HMRC accountants, and from those proposing the change, is that it has to be ‘payable’. In other words, if a company did not have sufficient corporation tax payable to offset against the above the line credit, then it would either have to be able to offset the credit against other taxes or could ‘cash in’ the credit for a payable sum.

The Government said that it is aware that moving to such a system for large companies would be a major upheaval to what is already a successful scheme but in view of the support expressed for a move to an ‘above the line’ credit it said that it would conduct further consultation on the issue.

"The Government would like to explore further with stakeholders the evidence base and the extent to which [this] would stimulate additional R&D in the UK or make the UK more attractive for internationally mobile R&D," said the report.

"The Government would like to discuss the design, complexity and compliance challenges that arise from introducing a new way of delivering the credit, including potential offset against corporation tax and other taxes, the treatment of loss-makers and the interaction with the SME scheme," it said.

"The Government has conceded to mounting pressure from industry to shift R&D tax relief to an ‘above the line’ system," said Kate Featherstone, a tax expert at Pinsent Masons, the law firm behind Out-law.com. "The consultation for implementation will be launched at Budget 2012 and, although detail won’t be released until the conclusion of that consultation, there is no doubt that this is a step in the right direction."