The new R & D Tax Credits Incentive was introduced for Large (Above 500 employees), Companies in April 2013.
It allows loss making large companies and SMEs forced to claim under the large company scheme to obtain a payable cash sum from HMRC.
The value of the above the line tax credit is 10% of qualifying R & D expenditure. However, as this cost reduction is “Above The Line”, the credit is subject to Corporation Tax. Companies can initially “opt-in” to the scheme as opposed to sticking with the existing R & D arrangements whereby super enhanced tax deductions are carried forward to use in profitable future years, or surrendered to a profitable parent company. It will be mandatory however from 1st April 2016.
The government introduced this change as an improvement, and it follows consultation with industry. The problem was that Large Companies making losses had no immediate benefit! Also R & D departments or technical/engineering staff had no visibility of any financial benefit. The fact that whatever the benefit may be, it was some time in the future IF profitable, and only understood by the Finance team, meant that it might as well not exist, as far as motivating R & D or technical people was concerned. Now people can see a reduction in the eligible costs attributed to a department “Above The Line” So this can be reported in the management accounts period by period and cumulative year to date.
One other problem was that companies which are subsidiaries of a foreign parent may not be able to access the UK benefit, due to tax liabilities increasing abroad if they did!
So should your company opt -in?
You must decide with advice, but as a rule there is an improvement of 0.8% in your tax benefit in 2013/14. This increases to 1.6% in 2014/15 and to 2% in 2015/16. So for most companies the answer is YES!