Summary
Following the March 2012 consultation on the 'above the line credit', the Government has implemented this measure for expenditure incurred on or after 1 April 2013, giving claimants the option of either claiming the 'R&D expenditure credit', or claiming tax relief for enhanced expenditure (but not both).
Whilst mainly applicable to large companies ('large' for R&D tax relief purposes), large company R&D relief can be applicable to SMEs (as defined for R&D relief purposes) who are unable to claim SME R&D tax relief, but meet the conditions for large company R&D relief (for example because they undertake certain subcontracted R&D, or the SME's R&D expenditure is subsidised, or the amount of R&D expenditure under the SME scheme is in excess of the capped amount).
The repayable 'R&D expenditure credit' is set at a rate of 49% for oil & gas ring fence businesses and 10% for other businesses. The higher rate for ring fence businesses takes account of the expenditure supplement available to those businesses where a claim is made for R&D tax relief under the existing regime.
For the period from 1 April 2013 to 31 March 2016 the company is be able to choose whether it claims the 'R&D expenditure credit', or makes a claim for R&D tax relief under the current provisions. However if it makes a claim under the new provisions, it will not be able to go back to claim the old provisions for future periods. Claims for R&D relief either under the enhanced or expenditure credit regimes must be included in a tax return or an amendment to a tax return. The time limit for making a claim is two years after the accounting period end (12 months after the filing date for the corporation tax return).
The R&D expenditure credit has the added advantage for loss making companies in that it may be possible to surrender the credit for a repayment (something previously only available to SMEs under the SME R&D tax relief provisions). For expenditure incurred on or after 1 April 2016 the only form of large company R&D tax relief available will be relief under the 'R&D expenditure credit' regime.
The credit is to be repaid as follows:
- Firstly against the company's corporation tax liability for the period.
- If there is any balance remaining, then it is only potentially
repayable if it does not exceed the amount of PAYE and NIC
liabilities in respect of staffing costs on qualifying R&D
expenditure. The amount of repayment of the 'R&D
expenditure credit' may thus be deferred for those companies
with low staffing costs incurred on qualifying R&D
activities.
If there is any balance available, then this can be offset against a corporation tax liability of the company for an accounting period other than the current one. If the balance remaining that is potentially repayable is reduced to nil (because of low UK staff costs and thus PAYE/NIC), then the amount of the reduction is treated as an R&D expenditure credit of the next accounting period. - If there is any balance of credit remaining after the previous step, then this may be surrendered to a group company and used to settle any corporation tax liability of that group company that relates to the same proportion of a common accounting period.
- If no group relief is claimed, or there is a balance remaining, the remaining balance is treated as a profit and the amount repayable is calculated as the amount net of the appropriate rate of tax (main rate if a non-ring fence company and the main rate and supplementary charge if a ring fence company). The main rate of corporation tax from April 2013 was 23% and from April 2014 it is 21%, dropping to 20% from April 2015. This reduces the maximum refund to 7.7%, 7.9% and 8% for the year ended 31 March 2014, 2015 and 2016 respectively.
- This 'repayable amount' (net of tax) is then to be used in settling any other sum payable to HMRC (for example VAT, other PAYE & NI costs, etc).
- If there is any balance remaining after that, then this is repayable in cash to the company, as long as it is a going concern.
- For quarterly instalment payment purposes, the R&D credit must be taken into account when computing quarterly instalment payments, but credit against corporation tax payments can only be taken once the claim has been made. The expenditure credit will therefore initially increase the taxable profit for the accounting period to which it relates (and hence payments of tax), while the credit against tax payable will only be available for offset once a valid claim has been submitted. If a company submitted its tax return with a claim for the credit on the same day as a quarterly payment was due, it could use the expenditure credit to discharge all or part of the quarterly instalment payment accordingly.
- In the period between April 2013 and March 2016 it will be necessary to consider whether it is more appropriate to claim under the new expenditure credit provisions or stick to the old (enhanced deduction) provisions. The old provisions do not provide for a repayment of large company R&D tax relief.
- Originally, the R& D expenditure credit was designed to be accounted for 'above the line' in the company's profit before tax but specific accounting treatment is not required under legislation nor guidance issued by HMRC. Accounts treatment may however impact cost-based contracts, staff bonuses, the reported tax rate and other financial ratios. The impact of accounting for the R& D expenditure credit should be explored before a claim is made.
- For the purpose of the R&D expenditure credit relief, a life assurance business that would otherwise be an SME for R&D tax relief purposes is to be treated as a large company.
- In conclusion the 'R&D expenditure credit' appears to be a further enhancement of the UK R&D regime for those claiming large company R&D relief.
- The following table summarises the comparison of a claim for a profitable company not involved in oil & gas ring fence activities under the old and new provisions, assuming the R&D expenditure credit in the new regime remains at 10% when the main corporation tax rate falls below 23%.
We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice.
You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents.
