Beginning next month, companies claiming R&D tax relief under the 'large company scheme' will be entitled to payable cash credits equal to 10% of qualifying expenditure. The new measure will be particularly beneficial to companies without tax liabilities who under the old super-deduction scheme could only carry forward their increased tax losses and who saw no immediate cash benefit. The new R&D expenditure credit will also allow companies to account for the relief in their operating profits, better incentivising investment in R&D. The chancellor has today announced an increase in the rate from 9.1% to 10% making the scheme even more beneficial.

The new R&D expenditure credit scheme for large companies will provide support to a wide range of industries and is predicted to provide additional relief of £1.1bn to innovative companies over the next 5 years. This together with the patent box relief which comes into effect from April this year and other measures such as the £2.1bn relief for the aerospace industry announced this week provides a strong package of support for innovation in the UK and a boost to global competitiveness.

Deloitte welcomes the increase in benefit. Our view put forward in the consultation process was that a headline rate exceeding a threshold of 10% will have a positive impact on the behaviour of R&D budget holders due to the psychological impact of a double digit relief rate.

The new R&D Expenditure Credit is being introduced alongside the existing super-deduction scheme. Companies have a three year period in which to elect into the new credit scheme following which the old super-deduction scheme will disappear from April 2016.

The policy goals of the R&D relief are for it to be accounted for "Above the Line" allowing companies to treat the credit like a grant and net it against the expenditure in their accounts thus providing increased visibility of the relief to R&D decision makers and making the relief more effective in maintaining and growing investment in R&D in the UK. The impact of the change will be the establishment of a closer connection between the relief and a company's R&D and technology teams.

One consequence of the increase in the benefit rate to 10% is that it will give a higher rate of post-tax relief compared to the existing super-deduction scheme from the outset (7.7% versus 6.9%) and this differential will increase as the tax rate continues to fall such that for the year ended March 2016, the post tax rate of relief for the new credit will be 8% compared to 6% for the super-deduction scheme. This will increase the incentive for companies to elect out of the existing scheme and into ATL before it becomes mandatory in April 2016.

Although it has taken a long time to get to this point (following three rounds of consultation which began in 2010), the draft scheme design does reflect the degree to which HM Treasury has engaged with and responded to a number of concerns raised by industry.

For example, in the most recent round of consultation, companies in the defence sector pointed out that, unlike the existing super-deduction scheme, the Ministry of Defence (MoD) would look to claw back the new credit in the pricing of non-competitive R&D contracts. In response, the government has stated that this issue will be addressed by the Single-Source Regulations Office – an independent body to be set up in 2014/15 and tasked with amending and overseeing single-source pricing regulations. Until then those companies affected may decide to continue claiming under the existing scheme.

Other issues were raised in relation to the proposed PAYE / NIC cap to be imposed on the payable credit available to companies without tax liabilities. Although seen as necessary to protect against abuse of the scheme, there is a concern that legitimate claims by companies which incur a high proportion of externally provided workers (such as in the software industry) or consumable items (typically manufacturers) could have their claims unfairly restricted.In addition the cap as it is currently drafted could penalise groups who have a single group employment company. We expect the definition of the cap to be revised in the Finance Bill next week to include PAYE/NIC in respect of connected party externally provided workers and we are hopeful that the level of the cap will be raised.

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