RESPONSE FROM TRUE RESEARCH LIMITED TO ATL
CONSULTATION QUESTIONS RAISED BY HM TREASURY IN MARCH 2012.
Author within True Research Limited: Barbara Arzymanow
True Research Limited is an independent consultancy
firm with expertise in financial matters relevant to R&D.
Further information about Barbara Arzymanow and her
published work is available at www.researchideas.co.uk
Do you agree with the above criteria for assessing
proposals for the ATL credit?
For the basic model of the credit, as it applies to
profit making companies, what is your assessment of its effectiveness in
meeting the criteria set out in Chapter 2?
The criteria are successfully met for companies
with sufficient CT liability to achieve maximum benefit.
Do you agree with the basic design proposals for the
ATL credit? In particular, do you agree that the credit should be taxable and
administered and settled through the tax system?
YES to both questions.
For the different models for the payable part of the
credit, what is your assessment of their effectiveness in meeting the criteria
set out in Chapter 2?
A fully and immediately payable credit is
The companies in most need of encouragement if
they are to establish, maintain or increase R&D in the UK are those that
will be necessarily loss making for many years. Such companies have the
greatest difficulty raising finance and therefore need the most immediate cash
in the bank. If they receive less financial support than profitable companies
then they are simply not on a level playing field. Furthermore, well-financed companies
that are about to launch major products resulting from R&D success are not
the ones in most need of support.
of a type of company that will inevitably be unprofitable for many years is an
emerging pharmaceutical business that plans to discover and develop drugs at
its own risk. A new drug often takes 6 to 10 years to develop before launch at
a cost that can well be over £100m. The risk of failure by any one company is
high but taking such risks is at the heart of why the USA has become
pre-eminent in the biotechnology industry and has the brightest future in pharmaceutical
A major global pharmaceutical company that
carried out most of its R&D in the UK but spread its production around the
world would necessarily make a loss in the UK. R&D is typically around 15%
of global sales in the industry whilst the UK is only 3% of the world market.
We want to encourage carrying out a major proportion of R&D in the UK, not
punish it. Similar principles apply in other high-technology industries where
the locations of R&D, production and customers can be separated.
A system that treats all companies in the
same way is obviously the easiest to administer and has less scope for
artificial tax planning, for example by manipulating where and when profits are
There is no harm in paying the credit net of
standard-rate corporation tax. What matters is that all companies receive the
same cash support at the same time.
Taken together, do the above models for the payable
credit change your assessment of the basic model of the credit in response to
Question 2? What are your overall comments on the basic proposals for the ATL
As set out in reply to Question 4 a fully
payable immediate credit is vital if major companies in certain industries (e.g.
pharmaceuticals) are to consider carrying out a high proportion of R&D in
the UK. Biotechnology companies aiming to develop drugs would also be seriously
disadvantaged by any option other than immediate, full payment.
Are there alternative models for the payable part of
the credit that the Government should consider? Please describe and explain how
this would better meet the criteria in Chapter 2.
No, unless a full and immediate payment
system for some unexpected reason cannot be implemented.
What challenges do you envisage businesses
encountering on taking up the ATL credit? If necessary please provide details
of any specific procedural changes and/or associated costs.
Providing the R&D specialist units
respond rapidly with accurate, comprehensive advice there should be no major
challenges that a sizeable international company should be unable to handle
with its advisers.
What specific steps could the Government take to help
businesses who currently claim the existing R&D tax credit transition to
Ensure that the R&D specialist units
have the resources required to give prompt, authoritative, comprehensive advice
in response to questions.
Do you think the ATL credit should fully replace the
existing R&D tax credit? If not, please explain why and what changes to the
ATL design might change your view.
Providing that care is taken to ensure that
no class of business is significantly disadvantaged, one system is better than
If both systems were to be retained, would some
businesses be likely to claim under both schemes? If so what would be the
administrative costs and issues associated with this?
If the ATL is well designed to avoid
unintended consequences, there is no reason why a company should wish to claim
under both schemes beyond the transitional period or indeed be permitted to do
so. Running two schemes increases the risk of tax avoidance techniques being
found that involve switching between schemes.
In what situations do businesses provide R&D
services to Government where the contractual arrangement or price could be
affected if the business claimed under an ATL credit as opposed to the existing
R&D tax credit? What would be the effect of this?
The essential problem arises when any
contract or agreement is arranged so as to control financial returns (profit, margins,
return on capital or reimbursement of costs plus an added profit). An
above-the-line credit will increase the return if nothing else changes. If
however the return is fixed contractually, there may be the perverse effect of
the Government paying less to keep the return as it was before and so effectively removing the benefit of
The solution for Government contracts and procurement
is for all return calculations to be done with the ATL and R&D tax credits stripped
out except where on a case-by-case basis Government decides otherwise.
Companies will readily agree to stripping credits out of procurement
computations because this change is in their interests.
The purpose of the ATL is to encourage
R&D that would not otherwise occur in the UK. Work commissioned by the
Government would generally take place anyway. There may be circumstances where
the Government may not wish companies to gain the full benefit of the ATL or
R&D tax credits. This area requires a policy decision by Government that
can be reflected in individual agreements.
In the case of pharmaceutical companies the
present PPRS appears to give drug companies the full benefit of the ATL without
the need for amendment. However, the matter needs to be double-checked with
expert legal advice and the wording of any future changes in the PPRS must be
studied carefully to make sure that the consequences are as intended.
Would you propose corresponding changes to the ATL
credit or procurement guidelines? If so what would these be?
See answer to Question 11.
To what extent might groups be disadvantaged if ATL
credits were not available on a group basis enabling companies to surrender
unused credit to fellow group members?
If all companies receive immediate, full
payment of ATL credits as we propose, then group structure has no relevance.
This provides an example of why immediate, full payment is administratively the
simplest (see answer to Question 4).
For relevant multinational business, what are the
effects on tax liabilities in other countries (or the home country) from moving
to ATL in the UK? If ATL does not fully replace the existing scheme, does this
Expert advice is required to answer these
questions but we would expect that ATL alone would be treated as a revenue
receipt above the line and that no special tax liabilities should arise. If the
existing scheme remains partly in place, there is more scope for concern given
the complexity of double tax agreements, anti-avoidance legislation and
transfer pricing policy around the world.
Do you agree that the Government should not replace
the existing SME R&D tax credit with an equivalent ATL credit?
One scheme must over the long term be easier
to administer than two. There is no compelling reason for SMEs to operate under
a different system from larger businesses, providing that a full, immediate
payment system is in place. The ATL system must provide benefits to SMEs at
least as attractive as the current system.
What would the additional impact be on SMEs of
introducing ATL for large business? In particular for SMEs making the
transition to the large company scheme and SMEs making claims under the large
company for subcontracted work for large business. Would these impacts be any
different than under the current large company R&D credit?
These problems can be avoided by introducing
an ATL scheme that covers businesses of all sizes and phasing out the existing
What would be the best way(s) to ensure that the
benefits of the scheme are only available to claimants on the basis of
activities that promote employment and innovation in the UK?
The rules can use exactly the above wording:
“ the benefits of the scheme are only available to claimants on the basis of
activities that promote employment and innovation in the UK”.
circumstances it will be obvious whether this requirement is met or not.
However, specific rules could be laid down to cover special situations. An
example might be when an R&D effort managed and directed from the UK
involves subcontracting work to businesses abroad or when a company carries out
an R&D project by cooperation between scientists in different countries.
The calculation of qualifying R&D expenditure in the UK could involve
certain guidelines such as that the R&D calculation can include the
employment costs only of people who are based in the UK. There could also be a
specific list of expenditure that cannot qualify as UK R&D e.g. work
carried out in an overseas laboratory, whether or not the project is managed
from the UK.
Do you think that there should be a rule to prevent a
claimant from entering into arrangements intended to ensure that it does not
suffer any reduction in the credit?
No. All companies should receive the full
payment immediately for the reasons set out in response to Question 4.
Do you see any other particular opportunities for
avoidance from the introduction of an ATL credit scheme?
A pure ATL scheme with full immediate
payments has very little scope for abuse if the recommendations followed in
response to Question 17 are followed and put into practice with appropriate
QUESTION 20 and A1 – A4
See Chapter 5 for detailed questions on the impact of
the ATL credit. See Annex A for detailed questions on the accounting treatment
of the ATL credit.
True Research Limited is an independent
advisory firm that does not itself carry out R&D. It is also not an
accountancy firm. We therefore only consider it appropriate for us to answer
Questions 1 to 19 inclusive, as above. Neither True Research Limited nor
Barbara Arzymanow has any commercial interest in the decisions reached in
relation to this Treasury consultation.