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Tax Factor

01 February 2013

Research & Development – The Large Company Scheme: 'Above The Line Tax Credits'

Draft Legislation has been published to be included in the new Finance Bill which will radically change the tax regime for large companies wishing to take advantage of the raft of R&D tax relief incentives. The new 'Above The Line' R&D Tax Credit is set out in the Bill which details how it will work for both Large Companies and potentially some Small and Medium Sized Enterprises (“SMEs”).

 

A Large Company is defined as having more than 500 employees and either more than €100m turnover or a balance sheet of more than €86m. Linked and partner enterprises (including group undertakings) need to be taken into account and accumulated when determining overall size.

 

To date, a claim under the Large Company R&D tax relief Scheme has provided for an enhancement of 30% of a company’s qualifying R&D expenditure. This enhancement has been accounted for as a deduction against taxable profits. The additional deduction is less than that available under the SME scheme and perhaps more importantly, unlike the SME scheme, companies making claims under the large company scheme have so far not been able to claim repayable R&D Tax Credits should they make losses. As well as affecting large companies the scheme also affects some SMEs as they may be restricted to making claims under the large scheme, perhaps because they perform subcontract R&D work or receive subsidies.

 

This will all change from 1 April 2013 when Companies will be able to claim the 'Above The Line' Tax Credit. Initially the scheme will be optional but from 1 April 2016 it will be mandatory. Prior to 2016 Companies that do not elect to claim relief under the new scheme can operate the current Large Company Scheme rules. However, once an election to use the new scheme has been made a company will no longer be able to make a claim under the pre-existing Large Company Scheme.

 

The scheme differs from the old regime in that, rather than providing a deduction from taxable profits only, it is applied in the company’s profit and loss account, i.e. 'above' the profit line, reducing the cost of qualifying expenditure. An 'Above The Line' credit will be available at a rate of 9.1% (or 49% for oil and gas companies, being a ring fenced trade) and will be a taxable credit on the company.

 

Some restrictions will apply which will 'cap' the maximum credit available to a company by reference to PAYE and NIC paid in respect of the staff involved in the qualifying activity. The rationale behind this capping is to try and ensure that the scheme is not open to abuse. In theory, by applying such a cap it should ensure that the qualifying R&D expenditure, to the extent it relates to staff involvement, will be undertaken at a local level and certainly within the UK.
Any claim for a payable tax credit will be settled by HM Revenue & Customs net of the main rate of Corporation Tax. The scheme will operate and be administered through the existing Corporation Tax system.

 

The proposed legislation permits surrender of the 'Above The Line' credit to group companies through the group relief provisions or for offset against tax liabilities from other periods.
The Government is trying to ensure a competitive tax environment exists in the UK through operation of a tax incentive system for any company to take advantage of R&D activity and stimulate R&D spending.

 

If you would like to discuss either the current or proposed regime or its applicability to your company, your Wilkins Kennedy advisors would be happy to assist.

 

Tim Croft
Partner

Hertford

T:    01992 550847

E: tim.croft@wilkinskennedy.com

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Matthew Hall FCCA CTA

Partner, Director of WK Corporate Finance, Head of Tax

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