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A look at the accounting and taxation aspects of the new above the line research and development (R&D) tax credit.

What qualifies as R&D expenditure?

Research and development (R&D) is defined as activities falling to be treated as research and development in accordance with generally accepted accounting practice, but the Treasury has powers to modify the definition by specific regulations. The relevant standards for this are SSAP 13 under UK GAAP and IAS 38 under International GAAP. However, the accounting treatment of the ATL credit is governed by SSAP 4 and IAS 20, since the ATL credit is akin to a government grant.

For the purpose of the tax reliefs available, R&D has the meaning given by section 1138 of the Corporation Tax Act 2010. This means activities which fall to be so treated in accordance with generally accepted accounting practice, but not including oil and gas exploration and appraisal. The BIS website contains Guidelines on the Meaning of Research and Development for Tax Purposes. 

Above the line tax credit

Following consultation with industry, the government announced at the Autumn Statement 2011 that it would introduce an ‘Above the Line’ (ATL) credit for large company R&D. This came into effect from 1 April 2013.

The intention of the ATL credit is to increase the visibility and certainty of R&D relief and provide greater financial and cash flow support to companies with no corporation tax liability.

Small and medium-sized companies can already benefit from a more generous system and we will look at this in next month’s In Practice.

Previously, large companies had been able to claim a ‘super-deduction’ of 130% of their qualifying R&D expenditure. Now, it is possible to elect for an ATL credit of 10% (Finance Act 2013, Schedule 15) as an alternative.

If a company wishes to take advantage of the new ATL tax credit regime, it must make an election to opt in to the scheme. Once the election has been made, it is not then possible to return to the 130% super-deduction. The ATL regime will replace the super-deduction regime for large companies completely from 1 April 2016 onwards. 

What is a large company?

What is a large company for the purposes of R&D tax relief? The important thing to remember is that, for R&D tax purposes, a large company does not follow the UK Companies Act definitions, but rather limits laid down by the European Commission. A company will be large for R&D purposes, if:

  1. It has 500 or more employees

    and

  2. Either annual turnover exceeds  €100m

    or

    the balance sheet total exceeds €86m

    and

  3. is not part of a larger enterprise that would fail these tests.

Any company which does not fall foul of the above threshold will be eligible for the more generous regime afforded to small and medium-size companies. 

How does the ATL relief work?

A key feature of the ATL credit is that it is a taxable receipt and it will be paid net of tax to companies with no corporation tax liability. Effectively, it is like a grant. This makes it more attractive for loss-making companies than the 130% super-deduction. Under the super-deduction system, a loss-making company would simply have a bigger loss to carry forward whereas under the ATL scheme, the company receives a payable tax credit.

You can see how the scheme works in these three scenarios 

Accounting treatment

As mentioned above, the ATL credit will operate like a grant and will be payable even if a company does not have sufficient corporation tax liabilities. The UK government has said it believes companies will be able to account for the fully payable ATL credit under both UK GAAP and IFRS. The current relevant accounting standards are ‘Accounting for Government Grants’, SSAP4 and IAS20 respectively.

Assume Selway Ltd incurs expenditure on qualifying R&D of £1,000 during the year:

The accounting entries would be:

DR     R&D                       1,000:         CR      Bank                               £1,000

DR     Corporation tax     100:            CR      ATL (taxable)              £100

The introduction of FRS102 accounting standards will see no change in the treatment. You may also want to view our Technical Factsheet on the changes to UK GAAP, as well as our Guide To… R&D Tax Relief. 

Article contributed by ACCA