Government R&D support to move “above the line”

Changes are proposed to the way large companies will receive the government’s financial support for their' R&D expenditure.

Currently, large companies incurring eligible R&D are entitled to a super-deduction in calculating their taxable profits. Every £100 of eligible expenditure gives a deduction of £130 for tax purposes.

It’s proposed to replace this super-deduction for tax by what’s called an above the line (“ATL”) R&D credit from next April. This ATL credit will be very similar to a government grant. Companies’ accounting cost of their R&D expense will be reduced by the ATL credit. As a result companies with R&D will show higher profits before tax. Companies will receive the ATL credit by reducing their corporation tax payments – so it’ll continue to be reflected in reduced remittances of corporation tax.

A stated objective of the proposals is the amount of government support for R&D should be unaffected by the change from the current system. The rate of ATL is expected to be about 9.1%.

At first sight, the change may appear as only one of presentation – the government support of R&D moves up the P&L from the tax line to profit before tax (the line that’s being referred to is the unseen one between profit before tax and tax charge in a companies’ profit and loss account).

There are likely to be potential winners (and possibly some losers) from the change. Winners include groups that don’t get any immediate benefit under the current system because they are not paying any corporation tax on profits, and companies with a US parent. Unlike the current large company regime, loss makers will be able to claim a payable R&D credit.

ATL credit will give more visibility to the R&D subsidy – the benefit is directly attributed to the R&D function and can be factored into investment decisions on incurring R&D.

The R&D incentive for SMEs will not change.

Mazars has helped many groups identify their R&D for the tax relief. The type of expenditure which is eligible for relief is much more than the typical image of R&D being only “men in white coats”. ATL will not change the definition of R&D. So we’d be pleased to talk to you now about whether your company might be eligible, and what steps you can take to secure maximum benefit both under the current system and under the ATL proposals.