R&D tax relief – the Large Company Scheme

Does the expenditure qualify for enhanced reliefs under the Large Company Scheme?

Relief under the Large Company Scheme is based on the SME Scheme, with a number of modifications. In particular, the overall cap on R&D relief for SMEs does not apply to the Large Company Scheme on the basis that the relief is not regarded as state aid. Expenditure which qualifies for Large Company Scheme relief is substantially the same as that which qualifies for SME Scheme relief, subject to a few modifications, principally in relation to subcontracted work.

What is the amount of the enhanced R&D large company relief?

Large companies’ relief involves allowing the company an enhanced deduction when calculating its taxable profits of 30% of its qualifying expenditure on R&D, in addition to the 100% deduction given under the normal rules for deduction of revenue expenditure. As is the case under the SME Scheme, this enhanced relief can either reduce the tax payable by the company or, if it is loss-making, increase the allowable loss available to the company.

In contrast to the SME Scheme, large companies cannot currently surrender a loss to HMRC for repayment as a cash credit.

New "above the line" tax credit

However, the 2012 Budget and Autumn Statement confirmed the Government's intention to introduce an "above the line" ("ATL") tax credit for large companies, with the aim of encouraging R&D activities by large companies.

Legislation regarding the ATL credit was included in the draft Finance Bill 2013 and will have effect for qualifying expenditure incurred on or after 1 April 2013. The ATL credit will be initially introduced alongside the existing enhanced deduction but will replace it in April 2016. If a company elects to claim the ATL credit before April 2016, then it will not be able to claim the enhanced deduction in subsequent accounting periods. Although the draft Finance Bill 2013 is subject to change, the following features are currently proposed:

The ATL credit will apply only to large companies to provide a credit against a claimant company's corporation tax bill.
The ATL credit can be paid out in cash, even in circumstances where the claimant has no corporation tax liability. However, the ATL credit will be a taxable receipt and will be paid net of main rate corporation tax.
In calculating the payable element, the credit will first be used to reduce the claimant's corporation tax liability for the current accounting period. The credit is then capped by the PAYE/NICs liabilities of the claimant's R&D staff (including PAYE/NICs liabilities incurred by group companies in providing externally provided workers), although any amount above the cap can be carried forward as a credit for the next accounting period.
The remaining amount after the PAYE/NIC cap is to be used to discharge any corporation tax liabilities of the claimant for other accounting periods, or can be surrendered to other group members. Any remaining amount after those steps, and after discharge of any other tax liabilities owing to HMRC, can then be paid out in cash to the claimant (net of corporation tax).
The main rate of the ATL credit will be 10% before tax (a higher rate will apply to oil and gas ring fenced trades).

Can UK subcontractors claim R&D reliefs?

A company cannot claim R&D relief under the SME Scheme if it is a subcontractor (i.e. if it has been subcontracted to do the work on behalf of somebody else). However, in some cases the SME company which has been acting as a subcontractor, will still be able to make a claim under the Large Company scheme.

To qualify under the Large Company Scheme, the R&D must be contracted out to the sub-contractor SME by:

a large company; or
any person otherwise than in the course of carrying on a chargeable trade. Chargeable trade" involves a trade, profession or vocation carried on wholly or partly in the United Kingdom by a person (the profits of which are chargeable to UK income tax); or a trade carried on wholly or partly in the United Kingdom by a company (the profits of which are chargeable to corporation tax).

In addition, the expenditure must be attributable to relevant R&D in relation to the company.

R&D related to a trade includes, but is not limited to any R&D which may lead to or facilitate an extension of the trade and medical research that has a special relation to the welfare of workers employed in that trade (for example research into an occupational disease).

The expenditure must also be revenue expenditure incurred on staffing costs, software or consumable items, qualifying expenditure on externally provided workers or is the subject of clinical trials.

percentage Provided the requirements outlined above are satisfied, the relevant SME subcontractor company should be able to deduct 30% of its qualifying expenditure on R&D (in addition to the 100% deduction given under the normal rules) when calculating its profits for tax purposes. This will either reduce the tax payable by the sub-contractor company or, if it is loss-making, increase the loss available to the sub-contractor company. There is no provision for a loss to be surrendered to HMRC for repayment in these circumstances.

In addition, it is currently proposed that SME sub-contractors will be able to claim an ATL tax credit on qualifying expenditure from 1 April 2013 which is broadly equivalent to the credit being made available to large companies (see above under section 'New "above the line" tax credit'). As with large companies, the ATL tax credit will be introduced as an alternative to the current 30% deduction for SME sub-contractors, but will replace the enhanced deduction from April 2016.

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