So George Osborne has again stated that the Government intends to introduce an Above The Line (ATL) R&D credit, following consultation. Although we are still waiting for the publication of the consultation document – I understand from HMT that they are aiming to issue it next week – the wording of the announcement causes me some concern.
First, though, a quick summary of why this is being considered.
At present, R&D Relief is given by way of an increased deduction in computing taxable profits. A loss-making SME can surrender its enhanced R&D expenditure for a (discounted) repayment. However, the fact that this is principally an extra deduction given in computing the tax liability means that it is accounted for in the taxation line in the accounts.
The problem that this causes is that, for many (especially larger) companies, the people who are actually doing the R&D see no tangible benefit from the relief. It is likely that they will be measured and rewarded on pre-tax results and saving tax will not benefit them direct. For this reason, the relief will not really be working as an incentive to increase R&D activity.
By moving the relief ‘above the line’ – ie by accounting for it as a reduction in R&D costs – the R&D cost centre will get a direct benefit from the relief. In this way, the incentive effect should be enhanced as the relief will make qualifying R&D more cost effective.
However, in order to get the required accounting treatment, the relief has to be a repayable credit. That is, it needs to be a credit against tax liabilities and, to the extent that it exceeds any tax liabilities, it needs to be repayable.
Now, on to my concern.
The Overview of Tax Legislation and Rates, published by HMRC and HMT on 21 March, states (with emphasis added):
“As announced at the Autumn Statement 2011, the Government intends to introduce an ‘above the line’ R&D tax credit in Finance Bill 2013 to encourage R&D activity by larger companies. The Government will consult on the detail but will ensure that SME R&D incentives are not reduced as a result of this change.”
In my mind, if we move to an ATL Credit, it must be for all companies, not just large companies. After all, surely the Government would want to encourage R&D activity by all companies. Whatever happens with this change, I believe that we absolutely do not want any unnecessary complexity added to the system. If we end up with two very different regimes we will have unacceptable complexity at the margin when companies grow (or shrink).
Yes, we need to ensure that SMEs do not lose out as a result of any change, but not at the expense of creating unnecessary complexity.