Government launches consultation on ‘above the line’ tax credit for large R&D companies

The new system will take effect from April 2013, as announced by Chancellor of the Exchequer George Osborne in his Budget last week. The credit will be at a minimum rate of 9.1% of R&D expenditure before tax.

Large companies will be able to deduct the amount of the ATL credit directly from their R&D spend in their accounts before making any other calculations. Loss-making companies unable to offset the amount of the relief against their accounts will be able to claim the relief, possibly at a discounted rate, as a payable credit. Under the existing system, large businesses must wait until they make a profit before they can benefit from Government support.

The change follows feedback to last summer's consultation on the R&D tax credit regime from large companies. The Government said that a desire to move away from the current 'superdeduction' system to a system which reduced a company's final tax liability rather than its taxable profits was the "most significant" response.

Under the current system, large companies can already take advantage of enhanced tax relief on R&D expenditure in certain circumstances but the large company scheme (unlike the scheme for small and medium-sized companies) did not entitle those companies to claim a payable R&D tax credit if they were unable to use the enhanced relief.

The Government said that the existing schemes provided around £1 billion support each year to around 9,000 companies carrying out over £10 billion of R&D expenditure, however the changes would make the system "more generous".

Exchequer Secretary to the Treasury David Gauke said that the credit would help ensure the UK was an “internationally competitive environment for all companies to innovate”.

“The Government is committed to encouraging research, development and innovation in order to achieve higher growth,” he said. “The ATL credit for R&D will encourage large company research and development, and ensure that the UK continues to be one of the most attractive places in the world to undertake R&D.”

Tax law expert Eloise Walker of Pinsent Masons, the law firm behind Out-Law.com, said that the possibility of a payable credit for loss-making companies looked particularly interesting. “It remains to be seen, however, to what extent the proposals will be more beneficial than what we have now,” she said. “Loss-making large companies look like they should benefit from these proposals, but the devil will be in the detail.”

The R&D tax credit rate for SMEs will increase to 225% from 1 April 2012. Legislation contained in the Finance Bill 2012 will also remove two restrictions from the SME scheme, including the end of the current £10,000 minimum expenditure condition.