Global Tax Alert | 07 February 2014

UK research and development expenditure credit may impact tax cash flow

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Under the terms of the UK research and development expenditure credit (RDEC) scheme introduced in 2013, the credit available discharges corporation tax for the accounting period. The tax liability is not reduced by the credit but is settled by it like any other payment made by the company. This is in contrast to the “super deduction” regime (available until 2016) which provides an enhanced deduction and thus a reduction in the tax liability itself.

HMRC (HM Revenue & Customs) has now noted that one effect of this is that, unlike the enhanced-deduction claim, a company will not be able to take account of the RDEC when calculating any quarterly instalment payments (QIPs) due for the current year corporate tax liability. Instead the RDEC will need to be claimed in the corporate tax return submitted after the year end and will then settle any tax due for the year in question.

Companies that have previously included the enhanced-deduction claim within their QIP calculations may, therefore, see an increase in the QIPs due, once they start to claim the RDEC instead.

Discussions have been held with HM Treasury regarding the mechanics of the RDEC and, in particular, the order of offset of the QIPs and RDEC against the corporation tax due for a period. HM Treasury has advised that, as the RDEC only discharges corporate tax liability, the order of offset would firstly be to set off the QIP payments and only then the RDEC against the tax due for a period.

This has the consequence that if the RDEC exceeds the remaining tax liability after the QIPs have been set off, then any excess credit will be subject to the seven steps for repayment set out in paragraph 104N Schedule 15 FA 2013. This may mean that profitable companies with significant corporation tax liabilities may still be affected by the PAYE/national insurance contributions cap on repayments, so that they may not receive the full amount of RDEC as a cash repayment.

Companies may wish to review the potential cash flow impact of the RDEC and consider whether it may be possible to submit RDEC claims in advance of the payment of the final QIP for a particular period.

For additional information with respect to this Alert, please contact the following:

Legal Ernst & Young LLP (United Kingdom), London
  • Frank Buffone
    +44 20 7951 1991
  • Faye Ruffles
    +44 23 8038 2047
Ernst & Young LLP, UK Tax Desk, New York
  • Sarah Churton
    +1 212 773 5994
  • Matthew Newnes
    +1 212 773 5185

EYG no. CM4161