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Loss making companies left out of R&D Tax Benefits

By 28th January 2014No Comments

The UK government in common with over 40 other countries rewards companies for investing in research and development. The reward is financial and in the form of corporation tax benefits. These R&D Tax benefits can be taken as a reduction in tax due, or as a cash refund of taxes already paid. This is great news for the United Kingdom as we attract and retain talented people in well paid jobs. We also have more chance to compete globally and drive up exports if we constantly innovate and develop higher value products people all over the world want to buy.

This good news story is not understood widely enough and as a result many businesses simply don’t claim. They think that they are not eligible. They think that R & D is something weird, done in laboratories by people with Bunsen burners and white coats! Of course that is true, but the other truth is that many engineering companies, food production companies and even software developers constantly risk spending money trying to solve technical problems. That expenditure on skilled people can often be eligible for tax relief.

Other companies do submit a claim using their accountants. This can work, but is unlikely to be maximised as the accountant may not be a scientist or engineer with relevant knowledge. Nor is he or she an expert in the regulations. The accountant relies on the company for the technical narrative, and the company relies on the accountant for knowledge of the regulations, and this leads to mutual caution. They worry about over claiming and the risks of any subsequent investigation or audit by HMRC.

Loss making SMEs can claim cash rather than wait to use the enhanced credit later when profitable. However there was no benefit available for loss making Large Companies (LC), who have to claim under a different scheme. So with effect from April 2012 HMRC introduced the Above The Line (A T L), Tax Credit scheme. This allowed loss making large companies (and SMEs’s forced to claim under the LC scheme), to make a claim where they couldn’t before, as a return to profit was a long way off. They could roll over the enhanced credit, but this was no use without a return to taxable profit. They may have also had large carried forward losses, so just didn’t bother.

As the scheme is designed to encourage genuine technological advance for the economic good of us all, this new option plugs a significant gap and should be applauded. Again though there is a significant problem with low awareness amongst both Financial Directors and the accountancy profession alike.

This credit shows as a reduction in R & D expenditure cost, which is visible in monthly management accounts. This makes it quick and easy to see and to understand for Engineering and R & D department managers. Previously the tax benefit was only seen by the finance department and only much later. Because it is now shown this way, it is above the line of taxable profit, hence the name “Above the Line Tax Credit”

UK subsidiaries of foreign parent companies also were sometimes not encouraged to lower their UK taxes paid as this increased the tax due for the foreign parent! This new scheme solves that problem too.

Large companies can choose to opt-in to the ATL scheme until April 2016 when it becomes mandatory. Factors affecting this decision require careful consideration by the Directors.