The consultation paper on the proposed ‘above the line’ R&D tax credit has been published (pdf). Key points from a speed-read are below (responses due by 29 June 2012 – we have some time!).
- for large companies only, SME relief stays the same
- consultation on whether or not the ‘above the line’ credit should replace the large company relief altogether
- reasons for it: visibility of R&D credit outside the tax department (seems like rewarding poor communication, but maybe I’m too cynical); certainty (because you get something, even if it’s a loss repayment – this one’s a fair point); and the ability to get something for losses
- there will be further review of the problems of R&D relief for work subcontracted by a large company
- the ‘above the line’ credit seems likely to be a State Aid, which may cut relief for SMEs that get State Aid grants (currently, they can claim large company relief on the project instead)
- minimum rate for the credit: 9.1% before tax – not subject to consultation. Treasury will decide on final rates after the consultation (note: not ‘after consultation’, but ‘after the consultation’; we don’t get a say, which suggests that the declining value of the large company relief isn’t likely to be addressed overall). A 9.1% credit after 22% tax (from 2014) is a 7.1% post-tax benefit (to 1 d.p.) post-tax, which seems better than the current large company relief (30% relief at 22% is a 6.6% post-tax benefit).
- The repayable credit for loss-makers will be a cash repayment, probably at a discounted rate. The SME repayment credit is barely discounted when compared to the immediate benefit for taxable SMEs, and this discount is largely to simplify the maths rather than discount fully – a loss-making SME can claim a repayment of up to 24.75% of R&D expenditure & relief (11% of 225%) from 1 April 2012; the additional tax saving for a tax-paying SME claiming the relief would be 25% of expenditure (125% at 20%). Of course, if the SME kept the overall loss, it would be worth £45 (225% at 20%) against profits in the future because the full loss on R&D expenditure is surrendered, not just the additional relief – so the repayment is substantially discounted against future benefit
- The ‘above the line’ credit would reduce the taxable expenditure on R&D in the profits, and then is deducted from any tax due – see the government’s simplified example in the paper. For taxable companies, the credit is first taxed and then deducted from tax. For loss-making companies, the credit would reduce losses and then be repaid. Unless it’s tweaked, the effect on losses for large companies would seem to be less than that for SMEs.
- There are a couple of options on repayment, intended to ensure that companies don’t have loss relief and a repayment as the Government seems to think large companies would be better able to offset losses elsewhere in the business.
Option 1 – repayment net of tax:
- The first option for the repayment of the ‘above the line’ credit is for it to be paid net of tax.
- However, that tax deduction from the credit could be carried forward to be offset against other liabilities where the losses are not used elsewhere.
Option 2 – discounted credit:
- The second option is a reduced payable credit – the paper suggests that “the ATL credit would be paid at a discount of (for example) 80 per cent”. When you look at the example, it looks more like they mean a discount of 20%, as the credit given is 80% of the credit otherwise available. That is, it’s a discounted rate of 80%, not a discount of 80%.
- The discount could be reclaimed by companies who return to profit within a short period – three years from the year of claim is suggested – to ensure that they aren’t prejudiced by comparison with the current system that allows them to roll forwards the losses. Can we introduce this for loss-making SMEs as well, please?
- There’s a suggestion that there may be some anti-avoidance rules around artificial diversion of profits to the R&D company to avoid a reduction in credit
Option 3 – considered and rejected, a system similar to the French version which pays a reduced credit and then pays the remainder of the credit over four years
- otherwise, if you have any bright ideas based on other international schemes, please let them know.
- there’s then a series of questions that the consultation would like a response to: particularly, should the ‘above the line credit’ be mandatory for large companies, replacing the current large company relief?
- There doesn’t seem to be any strong support for replacing the SME scheme with an ‘above the line’ credit (unsurprising, as the SME relief is already repayable, and smaller companies are less likely to have the communication issues that mean the relief isn’t recognised as belonging to R&D)
- SMEs would be able to claim the ‘above the line’ credit where necessary
- The Government doesn’t want UK branches claiming the relief where there’s little/no UK real activity – a PAYE/NICs cap is proposed (the PAYE/NICs cap is dead, long live the PAYE/NICs cap) as well as (surprise!) a general anti-abuse rule, incorporating a purpose test.