Download `above the line` credit for Research and Development

RESPONSE TO HM TREASURY Consultation on an
‘Above the Line’ credit for Research and Development
INTRODUCTION
The AAT is pleased to comment on the issues raised in the HM Treasury
consultation document on Above the Line credit for Research and Development.
We have over 50,000 full and fellow members and 68,500 student and affiliate
members worldwide. Of the full and fellow members, there are approximately 3,650
Members in Practice who provide accountancy and taxation services to individuals,
not-for-profit organisations and the full range of business types.
The AAT is a registered charity whose objects are to advance public education and
promote the study of the practice, theory and techniques of accountancy and the
prevention of crime and promotion of the sound administration of the law.
In pursuance of those objects the AAT provides a membership body. We are
participating in this consultation as part of our contribution towards the public benefit
of achieving sound and effective administration of taxes. We also feel that the issues
raised in this consultation paper will affect our members in practice.
OBJECTIVES OF THE DRAFT LEGISLATION
AAT notes that:
 The aim of the consultation is that tax relief for R & D expenditure is given as
a credit to offset against relevant expenditure and clearly visible in the firms
accounts.
 HM Treasury propose that this method of giving recompense is only available
to large firms – not SMEs.
CONSULTATION QUESTION RESPONSES
1. AAT agrees that the criteria of simplicity of administration of an ATL scheme,
certainty in usage and alignment with international accounting standards
should enhance the UK as a base for R & D firms.
2. For the basic model of ATL credit for a profit making company the disclosure
of the credit in the financial statement fulfils the criteria.
3. Providing that the rates of relief will clearly lead to the same tax liability, then
fairness of treatment dictates that the credit can be taxable. The presumption
is that the ATL credit is similar to a grant against revenue expenditure it does
not create turnover.
4. Where the credit is payable and timings are clearly earlier, then the
improvement to cash flow planning will help to sustain R & D firms to the end
of projects, especially those firms with no tax liability.
5. The basic model for the credit is good.
6. AAT has practice-tested the propositions and is unable to suggest any
alternative models for the payable part of the credit at this stage.
7. There are likely to be some difficulties allocating costs to the correct periods
during transitional year. The requirement for a split computation in the
transitional year may also be difficult. It is important that the shift to ATL is
wholesale for each firm.
8. The most helpful position for Government will be to agree and to confirm the
unused relief under the existing scheme to be carried forward. Of next
importance is to have the resources to quickly process claims as soon as they
are made. It may be prudent to ask R & D firms to move their year end to 31
March if switching to ATL credit.
9. AAT’s view is that the choice of claim system should not be discretionary.
This is to ensure certainty of understanding by the user.
10. There is no clear reason for having two systems, except in the transitional
year.
11. The objective of ATL is to achieve the same overall objective as the R&D tax
credits with the additional objective of improving the attractiveness of the UK
as a location for R&D investment. Therefore, assuming all other factors
remain the same, then there should be insignificant changes to the costing
and pricing of contractual arrangements by businesses providing R&D
services to the Government,
12. AAT has no comments on this question.
13. AAT agrees that in certain group arrangements relief arising from R & D could
be utilised elsewhere in the group as group relief. ATL credit is specific to the
R&D firm. An option must be available for unused credit of the R & D firm to
be made available to its group instead of a discounted payment to the R & D
firm.
14. On page 17 of the Consultation Document it states, “The Government’s
current understanding is that these types of business (US based
multinationals) do not benefit from the existing scheme.” This suggests that
the existing scheme is not attractive enough to encourage US based
multinationals to undertake R&D in the UK.
15. AAT would prefer to see ATL applied to all R & D claims regardless of size of
firm. The disparity between the relief rates for SMEs and larger firms would
need to be considered. For SMEs cash flow difficulties are often greater
because whilst R & D work is being undertaken this bars limited resources
from producing turnover. For SMEs later classified as large firms there would
be no difference in treatment of R & D credit.
16. Where the schemes for SMEs and large firms remain different then there may
be unused credits at the point of reclassification and this issue will need to be
addressed.
17. Linking the availability of the ATL credit for overseas companies with UK
Branches to the level of Employer NIC contributions acknowledges the need
for human input into R & D projects. However this input may not be high
where computers are used for modelling or sub-contractors produce
prototypes.
18. There should be a rule to prevent arrangements that will forestall a reduced
credit.
19. AAT does not see any other particular opportunities for avoidance at this
stage.
20. AAT has not undertaken R & D work so this won’t have had an impact on
business decisions to date. Looking ahead if AAT was to receive tax relief on
R&D expenditure in the future it is possible that this would be re-invested into
extra R&D dependent upon the needs of the business at that time.
A1
The preferred accounting treatment under IAS20 would indicate that the ATL amount
is treated as a grant against R & D expenditure.
A2
The full payable credit (net of tax) should be shown ATL.
A3
Where a firm opts for a reduced payment then this should be shown ATL.
A4
AAT’s main concern is that the credit should be of a uniform nature for all firms,
regardless of size. Also, AAT believes that the claim process should be clear and
certain in its operation.
CONCLUSIONS
Making R & D credit more visible might encourage further investment in R & D
projects creating employment, and generating employment and taxes if the projects
prove to be successful.
AAT would recommend a robust process where taxpayers can be assured that any
HMRC guidance and decisions can be clearly understood.
AAT broadly supports the introduction of the Above the Line credit for large firms who
have expenditure for R & D work. The examples suggest that this can improve the
effectiveness of support for large firms by clearly showing that R & D work creates a
profit.