We recently wrote about the proposed Patent Box and the tax deduction against trading profits it allows. But this is only half the story.
Research and development expenditure is itself subject to tax relief, currently in the form of a 225% ‘super-deduction’ for SMEs and a 130% one for larger companies. In other words, companies get a full tax deduction of 100% of qualifying expenses, then further deductions of 125% and 30% for SMEs and large companies respectively. Using the main corporation tax rate for 2012/13 of 25% these equate to payments of 31.25% and 7.5% of expenditure.
Generous though these reliefs are, they have not been particularly effective in spurring R&D in large companies. This, however, may be about to change.
A relief ignored
A report by PWC (premium content) in response to a public consultation has highlighted that the majority of large companies do not take R&D relief into account when making R&D investment decisions. This is despite the fact that the available relief means that the Government effectively subsidises companies to carry out qualifying research and development.
This seemingly strange state of affairs is due to a quirk of accounting. Currently, R&D relief is given as a deduction against corporation tax, so does not feature in companies’ pre-tax accounting figures. Unfortunately, most companies use this pre-tax figure in their investment decisions.
Moving on up
The solution (pdf), announced alongside the draft 2012 Finance Bill, is to move the relief ‘above the line’ in company accounts. Instead of treating the relief solely as a corporation tax deduction, it is proposed that it will be a payable credit and therefore will appear in the pre-tax accounting figures. This also means that loss making companies with no corporation tax liabilities will still benefit from R&D relief, providing greater certainty of its benefits when planning investment.
It is estimated that such a move will cost the Government around £205m but bring benefits of £665m. Whether that is considered to be enough of a payoff in the current climate should become clearer in March when a consultation on the design of the credit will be launched alongside the 2012 Budget.
As announced in the 2012 Budget, the ‘above the line’ credit will be introduced in the 2012 Finance Bill. This has now gone out for a further consultation. Notably this includes a question on whether an above the line credit should be available for SMEs as well.