Monthly Tax Idea - May 2013

'Above The Line' (ATL) improves Research & Development tax incentive for companies

A new way for the Government’s reward to large companies for their spending on research and development expenditure will increase the popularity and visibility of this valuable tax relief.

Since introduced in 2002, claims under the large companies’ R&D scheme give a reduction in the amount of the company’s corporation tax payment. Your company may be amongst those which have not made R&D claims.  Perhaps your company has tax losses, or for some other reason is not paying tax – ironically possibly because of sizeable spending on R&D – so there’s no immediate pay back.  Or perhaps the lack of a claim is because of the way your performance measurement system operates. If it’s based on a profit before tax measure, this disincentivises those best placed to identify R&D projects – there’s no reward for those in the operational departments spending time identifying possible R&D projects.

Any company not claiming R&D, or any company that thinks it’s claim might not be picking up all possible R&D, the introduction of the “Above The Line” R&D credit will be a real boost. ATL will give all companies an immediate and visible benefit from a claim for R&D relief.

By making the appropriate election for ATL, the company will be entitled to claim its R&D incentive as a 10% grant against its eligible R&D expenditure. This ATL credit will thus appear in your accounts as a credit against expense in the profit and loss account. 

The effects of claiming under ATL will be:

  • an increase in the company’s profit before tax
  • if the company is tax paying, the ATL is set against the company’s corporation tax liability
  • if another member of the group is tax paying, the ATL credit can be passed to that company and the amount of corporation tax it is due to pay will be reduced by the ATL R&D credit
  • companies with no current tax liability will be entitled to a cash payment of part of their ATL R&D credit

For a company seeking a cash payment for their ATL credit, the amount to be paid may be capped by reference to part of the PAYE and class 1 national insurance paid by the company. Subject to that capping, the ATL R&D credit will be paid net of a withholding in respect of corporation tax. This withholding is then available for offset against future tax payments by the company. 

The legislation to bring in ATL is still going through Parliament, but in fact ATL has already started. A company can elect for it to apply to R&D expenses incurred from 1 April 2013, regardless of the company’s year end. 

Companies should be acting now to ensure their systems capture the data required for their R&D claims. What qualifies as R&D for tax can be surprisingly wide; much wider than the popular image of scientists in white lab coats, and we have secured R&D claims for a diverse range of clients 

We would be pleased to look at your company’s activities to identify possible R&D and advise on ways to maximise your claims to what has become a much more valuable relief.