Above-the-line R&D tax credit brings incentives – but not for all

Tuesday, July 10, 2012 | Posted by: Grant Thornton
Categories: Tax, Technology sector | Tags: tax relief, R&D, Budget 2012, Research & Development, ATL, Above the line, Chris Harrison

Large companies are facing a change in the way they receive tax relief on qualifying research and development (R&D) activity. Chris Harrison, a member of the Treasury’s Consultative Committee, welcomes the new ‘above the line’ tax credit but says that the proposals as they stand are not suitable for everyone.

In my previous post in April I wrote about the Treasury’s proposal to move away from a system whereby R&D tax relief is claimed as an enhanced deduction in the tax computation and contained in the accounts in the tax charge, and move towards a system whereby relief is brought into a company’s accounts as a credit ‘above the tax line’ (ATL). The reason for the overhaul is to encourage R&D by larger companies, ie those companies which are not eligible for the more generous small and medium sized enterprises (SME) R&D tax credit scheme.

Since then, I’ve been involved in a number of Treasury-led workshops attended by industry representatives and their advisers, and also in the preparation of our response to the Treasury’s consultation. The deadline to submit responses expired at the end of June and we now eagerly await the draft legislation, which is expected in later this year ahead of implementation in April 2013.

In favour of the ATL scheme
While we wait I’d like to share with you our main conclusions and concerns from the consultation, together with a link to our own submission, which reflects our views and those of our clients, for whose input we are grateful.

Before getting into the detail, it is worth saying that we have been genuinely impressed at how receptive the Treasury has been throughout the consultation process. This reflects the Government’s stated commitment to making the UK one of the most attractive countries to site R&D investment.

In general we are in favour of the proposals.

An ATL credit, accounted for in the operating profits of a company, will be more apparent to investment decision-makers and arguably offers better incentives to carry out R&D. In addition, loss-making companies should be immediately entitled to cash refunds and the simplicity with which the relief is calculated will bring greater certainty to claimant companies.

ATL – not suitable for everyone
There are a significant selection of companies, however, for which the ATL treatment would be inappropriate: specifically those who have pricing arrangements that effectively require any unanticipated profits to be shared with their customers. In line with these arrangements, an ATL credit, treated as income and included in the operating profit, would necessarily have to be shared with the customer, thus reducing the incentive effect of the scheme.

This problem, though typically relating to companies with government contracts (such as those in the defence sector), is also relevant to other companies who have similar pricing structures with their private customers.

Other options
In our response to the consultation we have therefore proposed that companies should be provided with flexibility over whether the relief is accounted for above or below the tax line (potentially through an opt-out). It is our view, and the view of several other parties, that this would:

• appeal to a wider selection of multinational companies
• avoid the disadvantages that an ATL credit would bring to certain companies
• provide companies with the ability to incentivise a wider selection of ‘decision makers’
• simplify the position for SMEs that claim under both schemes
• avoid administrative burden in situations where companies frequently make the transition between SME and large company status.

Webinar and consultation response
We are hopeful that our proposals will be given due consideration before the draft legislation is released. In any event, we are planning to hold a webinar, around that time, that I would like to invite you to.

As well as ATL and how it is likely to impact your business, we will also be discussing patent box and the significant opportunities it represents.

Further details of the webinar will be released when the timing has been finalised.

For now, if you would like to read our consultation response, please download the PDF: Consultation on an ‘Above the Line’ credit for Research and Development: comments on the documents released on 27 March 2012.

You might also find these posts useful:

* Technical notes for FDs: Patent Box and R&D tax credits
* Treasury announces further consultation into an above-the-line tax relief for R&D in large companies
* R&D tax relief review (2010) – threats and opportunities for UK plc