Oil and Gas Eye Q4 2012
Above-the-line R&D tax credit
Special provisions for Oil and Gas companies
The draft Finance Bill 2013 and final consultation response from HM Treasury regarding the proposed above-the-line (ATL) R&D tax credit scheme has been released, with new details on its operation.
An ATL scheme allows the benefit of the R&D relief to be accounted for as a reduction of R&D expenditure within the Profit and Loss account. The associated tax credit is offset against corporation taxes payable.
The good news is that there will be a special R&D credit rate of 49% for companies inside the ring-fence to maintain the current level of effective relief for oil and gas companies.
HM Treasury have clearly listened to industry representations campaigning for an increased ATL rate for these companies to ensure the continued attractiveness for R&D investment.
Summary of changes
Following the consultation period, the UK Government has decided that the ATL credit will be:
- A taxable credit paid at a headline rate of 49% for companies carrying on a ring-fence trade
- A taxable credit paid at a headline rate of 9.1% for companies not carrying on a ring-fence trade
- Fully payable, net of tax, to companies with no corporation tax liability (subject to cap detailed below)
- Available for qualifying expenditure incurred on or after 1 April 2013
- Introduced alongside the existing super-deduction from 1 April 2013 and replacing the super-deduction from 1 April 2016
- Introduction of a PAYE/NIC cap on the payment of the credit to companies with no corporation tax liability
- Available to surrender against group companies’ corporation tax liability.
Throughout the consultation period, concerns were raised regarding companies with a ring-fence trade and profits taxed at 62%. In particular, a mandatory ATL credit of 9.1% would have reduced the benefit of the R&D credit regime for these companies from 18.6% to 3.5%.
To address this, it is intended that the ATL credit will be paid at a 49% headline rate to companies with a ring-fence trade, to maintain the same effective rate of relief provided by the super-deduction scheme.
For companies without a ring fence trade, the 9.1% taxable credit provides the same R&D relief as the super-deduction scheme, ensuring companies are not worse off under the new proposals.
Receiving equal value
Currently, large companies with tax losses get little or no incentive from the superdeduction scheme. An ATL scheme with a payable mechanism benefits and rewards companies undertaking valuable qualifying R&D regardless of their corporation tax profile.
The ATL credit will be introduced alongside the existing super-deduction on 1 April 2013 and fully replaces it from 1 April 2016. Companies will be able to elect to claim R&D relief via the ATL credit at the end of their accounting period for expenditure incurred on or after 1 April 2013. Once a company has done this, it will not be able to claim via the super-deduction scheme.
PAYE and NIC cap
The Government has announced it will limit payable credit to the amount of a company’s PAYE/NIC liabilities in relation to staff engaged in qualifying R&D activities in the accounting period. This cap will apply to the credit after the offset of the claimant’s current-year corporation tax liability.
The amount up to the cap can be utilised in a variety of ways, including group relieved or offset against other tax liabilities of the claimant company. The order of offset is prescribed by legislation. The excess over the cap will be treated as an above-the-line credit in the following accounting period.
Qualifying R&D activities in your sector
Examples of areas which may contain potentially eligible R&D:
- Development of technologies to help optimise the wellbore position
- Development of new or improved technologies to support oil upstream processes, such as new rotary drilling techniques and directional drilling
- Advances in extraction techniques, equipment and materials, including fracturing technologies
- Development and advances in equipment and methods to enable extraction in adverse and technically difficult environments
- Extending the operation of mature oil fields and aging reservoirs beyond normal economic life with the development of enhanced oil recovery techniques
- Development of new or improved detection techniques that can identify and prevent the cracking or corrosion of existing oil pipelines
- Advances in new environmental techniques that prevent or manage oil spills or reduce waste or energy consumption
- Development of new technologies to increase efficiency, accuracies, production yield and throughput of midstream and downstream processing plants
- Development and advances in equipment, processes and techniques to improve reliability and safety
- Improvements and development of refining and processing techniques, such as production of lighter oils, gas purification technologies, and improvements to hydrocarbon properties through additive inclusion and blending
- Enhancements in storage and transportation technologies for LNG and alternative fuels
- Integration and improvement to monitoring, metering and purchasing technologies, including point-of-sale technologies and system integration.
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 relevant accounting standards are ‘Accounting for Government Grants’, SSAP4 and IAS20 respectively.
Companies may have a number of options to allocate the credit against their R&D expenditure within the P&L. They may opt to credit the total R&D spend within the P&L or allocate it to the total expenditure of the individual R&D departments or, lastly, reduce expenditure incurred on the R&D project to which the credit relates.
Now is the ideal time for companies to assess whether to elect into the ATL scheme or remain under the super deduction scheme until April 2016.
As the ATL credit will need to be included within the P&L, it is more important than ever to keep documentation so the credit can be calculated as soon as possible after year-end.
The importance of documentation to demonstrate that criteria have been met cannot be underestimated. Part of the claims process is the identification of eligible R&D activities and provision of supporting evidence to substantiate a claim’s scientific and financial aspects. Ensuring adequate procedures are in place is crucial to accurately calculating and obtaining benefits.