UK: Research And Development Tax Relief – Above The Line Credit

Last Updated: 18 September 2013
Article by Smith & Williamson

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 'above the line 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 main rate of corporation tax from April 2013 will be 23% and from April 2014 it will be 21%, dropping to 20% from April 2015. The repayable 'above the line 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 'above the line 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. The above the line 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 'above the line credit' regime.

The amount of repayment of the 'above the line credit' may be deferred for those companies with low staffing costs incurred on qualifying R&D activities. 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. 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). This reduces the maximum refund to approximately 7.7%.
  • 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.

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 provisions or stick to the old (current) provisions. The old provisions do not provide for a repayment of large company R&D tax relief.

For the purpose of the above the line 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 'above the line 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 (existing) and new provisions, assuming the above the line credit in the new regime remains at 10% when the main corporation tax rate falls below 23%.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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