The Government published the long awaited consultation document on the Above The Line (ATL) Credit for R&D yesterday. Here is my initial analysis of the proposals.

Before looking at the proposed structure, it is worth looking at David Gauke’s foreword. In this, he states that the Government “would like a system for supporting R&D which is simple for both business and HMRC to administer.” I don’t think anyone would argue with that wish – I just hope we achieve that simplicity.

The condoc sets out the Government’s policy objective for the ATL Credit:

… a new type of credit for supporting R&D, which will be more effective in supporting innovation by large companies. The Government’s aim is to do this in a way that is consistent with fiscal sustainability, simplicity and ease of administration within the tax system.

The criteria for the ATL Credit are set out as:

  • effectiveness at enhancing UK R&D
  • affordability
  • simple and straightforward to administer
  • sustainable and not open to abuse
  • meets UK and international accounting requirements and complies with EU State aid rules

The basic model being proposed for the ATL Credit is:

  • ATL Credit computed direct from qualifying R&D expenditure
    • the credit would be used against the company’s CT liability
    • at present, the proposal is for a rate of 9.1%
  • The ATL Credit would be taxable
    • this allows a higher headline rate. The proposed minimum rate of 9.1% gives the same after tax benefit as the current 30% superdeduction
  • The ATL Credit would be payable in cash to companies with no CT liability
    • it is suggested that this payment might be at a discount
  • The ATL Credit is to be administered through the tax system

For companies with a CT liability, this would be pretty straightforward. The ATL Credit would be accounted for as a reduction in R&D costs. This would lead to higher taxable profits (since deductible costs are reduced) and, therefore, a higher tax charge. However, the ATL Credit would then be used to ‘pay’ down part of that liability. Ultimately (if the rate is set at 9.1%) the company ends up in the same position as it would have been in with the current R&D relief.

Companies that do not have a CT liability will be able to get the ATL Credit paid out in cash. This is an enhancement on the current regime where large companies cannot get a repayable credit. Such payment would be made net of tax, with the tax withheld being carried forward for use against future CT liabilities. The condoc suggests that this payment might also be at a discount, with the discount element being carried forward for three years.

There are a series of specific questions posed by the condoc, including four on the all important accounting treatment. However, my initial general thoughts are as follows:

  • Overall, I believe that the ATL Credit will be a good thing for UK R&D.
  • The ATL Credit is being restricted to large companies only, SMEs will retain the current relief. I believe that this is really unfortunate. I can understand the concerns of many smaller companies that the ATL Credit seems an unnecessary complexity. However, the complexity of having two totally different regimes for SMEs and large companies will cause problems at the margin.
  • The ATL Credit is clearly being limited to use against CT liabilities only. I wonder whether it would be a better system if other taxes were included – assuming HMRC’s IT systems could cope, of course.
  • It is inevitable that the payable credit will be discounted; introducing this regime will have a cost, so minimising that cost will be important to HMT. However, it is to be hoped that the system, with various carry forwards, is kept as simple as possible.
  • I hope that sense will prevail regarding the commencement of the ATL Credit regime. The current suggestion is that it would apply for claims made after 1 April 2013; surely this would mean claims being made for periods where the accounts are already prepared and published! I would have thought it better to make it apply for accounting periods ended on or after 1 April 2013.