A new ‘Above The Line’ (‘ATL’) credit for Research and Development (R&D) has been introduced from 1 April 2013. This article investigates the proposed ATL credit and how it might affect your business.
What is the ‘Above the Line’ credit for Research and Development?
The ATL credit for Research and Development has been introduced to address some perceived concerns with the current ‘super-deduction’ from taxable profits for qualifying R&D expenditure:
1. As the incentive is calculated and reported as a tax adjustment, it may not be taken into consideration in the costing of projects by R&D teams in larger organisations, in which case it could fail in its intention of encouraging innovation by UK companies.
2. Some companies reporting tax losses cannot elect to ‘cash in’ R&D tax losses for a cash payment from HM Revenue and Customs (HMRC).
The new ATL credit for R&D is intended to address these concerns. It will provide a direct credit from HMRC against qualifying R&D costs, which will be payable regardless whether the company is profitable or loss-making. The ATL credit should therefore effectively provide a ‘retrospective subsidy’ against eligible R&D costs, which will be easier for R&D teams to factor in to project costings.
It had previously been indicated that the ATL credit would be at the rate of 9.1% of eligible R&D costs. The Chancellor announced in the 2013 Budget that this will now be increased to 10% of eligible R&D costs.
The credit will itself be taxable, and will therefore be reported ‘Above The Line’ in pre-tax profits in the company’s financial statements.
Does it affect your company?
Companies which are eligible to claim R&D tax incentives wholly under the scheme for small and medium-sized companies (which is more beneficial in any event) can continue to do so and will not be affected by the ATL credit for R&D.
Larger companies, and small and medium-sized companies whose R&D is funded or subcontracted to them by third parties, should consider whether the ATL credit might present an opportunity to reduce their R&D costs. This should include revisiting any previous decisions based on advice received in the context of the current schemes of R&D tax incentives, as the new ATL credit changes the landscape considerably.
Do you need to do anything?
As noted above, the ATL credit for R&D has been introduced from 1 April 2013 and it is recommended that affected companies should seek specialist advice as soon as possible to establish whether they should elect to claim under the new scheme.
The ATL credit will initially be optional until 1 April 2016, after which it will become mandatory for companies wishing to claim the R&D tax incentives under the ‘large companies’ scheme. Companies already claiming R&D tax incentives under this scheme may therefore choose to continue to claim the super-deduction from taxable profits for expenditure up to 1 April 2016 if they wish. However, with the proposed increase in the ATL credit to 10% of qualifying expenditure, it may be more beneficial to opt in to the new ATL credit scheme.