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‘Above the line’ tax credit in 2013 will encourage R&D

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29th Nov 2011
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In today's autumn statement, Chancellor George Osborne announced the government's Innovation Strategy to be detailed in its forthcoming publication, Innovation and Research strategy, says Micah Levy, director at Research & Development Tax Credits.

The key announcement was the introduction of an ‘above the line’ tax credit in 2013 to encourage research and development (R&D) activity by larger companies. This would effectively be a credit against the company’s corporation tax bill rather than an enhanced deduction.

This proposal moves from the current super-deduction to a system which reduces the company’s final tax liability rather than its taxable profits.

The advantage of this is that it delivers a better incentive effect for an assumed little additional cost. The R&D incentive is currently reflected in the taxation line in most company accounts, so it is very often the case that “ownership” of the R&D tax claim sits within the finance or tax department and it is not possible for an R&D team to record the R&D benefit in the results for which they are responsible. This inability to book the R&D incentive within the R&D team can result in it being disregarded in investment calculations.

To be able to account for the credit ‘above the line’ it would have to be ‘payable’. In other words, if a company did not have sufficient corporation tax payable to offset against the above the line credit, then it would either have to be able to offset the credit against other taxes or could ‘cash in’ the credit for a payable sum. This would give companies a fair degree of confidence about when the benefit of the credit would be received and how much it would be worth, allowing them to book it to the R&D cost centre in their accounts.

Currently, large loss-making companies have little incentive to claim the relief if they do not expect to become profitable in the near future and we believe that the cost of the scheme will increase significantly as a result of this.

The Government has advised that it will consult on the detail at Budget 2012 and will ensure that SME R&D incentives are not reduced as a result of this change.

Micah Levy is a director at Research & Development Tax Credits.

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