One of the options put forward in the latest (June 2011) R&D consultation document is a move to an above the line credit (ATL).  This proposal comes in response to comments made by various respondents to the earlier (November 2010) consultation exercise.  Before looking at the answer to this question, it would be sensible to outline the issues.

The current R&D relief regime provides companies who carry out qualifying R&D with a “super deduction” in respect of their qualifying costs.  In other words (using the rates valid from 1 April 2011) a large company will be able to deduct 130% of its qualifying costs in computing its tax liability, whereas a SME will be able to deduct 200% of such costs.  A loss-making SME may be able to get a repayable credit equivalent to 25% of its qualifying costs (subject to a cap).
The problem with this regime is that the people who are responsible for actually doing the R&D very often do not see the benefit of the relief that is obtained as a result of their activity.  The relief is delivered to the company through the tax system and is disclosed as a tax relief on the tax line in the P&L.  It is very difficult for the benefit to find its way back to the R&D team.  They are often unaware of the benefit obtained by the company for their work and, even if they are aware, as a tax line item it is a ‘corporate’ issue.  In practice, this is a bigger issue than simply making these people feel good about what they do.
The argument is that if the benefit could be fed back direct to that part of the business actually conducting the R&D, they would be far more likely to feed that benefit into their investment decisions around new R&D projects.  This in turn is more likely to result in increased R&D as the R&D relief will be seen as a reduction in the cost of the R&D activity, making it more economical.  Indeed, in a multinational group, the UK R&D team may be able to win a greater share of the group’s global R&D spend as their costs will be reduced by this relief.
The key to all of this is that the relief would have to be capable of being accounted for as a reduction in cost – i.e. above the line – rather than as a reduction in tax.  Now, the vagaries of IFRS, or even UK GAAP, are beyond the scope of this Blog, however I understand that, in order to be accounted for above the line, there are broadly two requirements.  One is that the relief cannot form part of the calculation of the profits liable to tax.  The other is that the credit would have to be capable of being refunded, irrespective of the level of tax already paid (i.e. not simply a repayment of tax already paid).
So, should we consider such a change?
In a word – yes.
The policy objective of the R&D relief is to incentivise UK companies to carry out R&D.  My own experience is that the current method of delivering this relief is not terribly effective in incentivising the people who are actually capable of influencing the R&D investment.  If, on the other hand, the relief were to be given in a manner that could be accounted for as a reduction in R&D costs, it would surely influence the investment decision.  That, indeed, is the view of a great many companies.
Of course, I recognise that such a change might have a cost for the exchequer – the repayable nature of an ATL credit would mean that loss-making large companies would get a repayment that is denied to them under the current regime – but this is a change that has a very high likelihood of producing an increase in economic activity in the UK.  That has to be worth pursuing.