R&D light bulb

 

With the December busy period for corporation tax submissions approaching many businesses may be set to encounter the CT600L for the first time. This new supplementary page was introduced from 1 April 2021 to support claims for research and development tax reliefs.

The form is largely auto-completed from existing entries in the tax computation and is for the most-part working as designed. There were some initial teething issues on this form though, mainly in respect of Step 2 or Step 3 amounts brought forward. These were partly ironed out by HMRC in an update to their e-filing system in May allowing taxpayers to get to the right amount of tax, but certain disclosure issues remain outstanding with further resolutions expected for the 2022 update to the CT600.

This post seeks to cover some of the queries we have been receiving from customers recently in this area.

Background to the form

The form CT600L must be used for all new or amended submissions from 1 April 2021 which include an R&D tax credit. This supplementary page primarily works through the detail of the 7 step RDEC set-off amount calculation of s104N CTA 2009, but also includes summary details of tax credits arising under the SME R&D scheme.

The form proves the amounts entered in boxes 530 – Research and Development credit – and 880 – Payable Research and Development expenditure credit – on the CT600.

Refer to our R&D tax reliefs article for more detailed background to this form.

RDEC amounts offset before or with Step 1

The main problem area upon the initial introduction of the form CT600L related to the treatment of amounts offset against any corporation tax liability before or with Step 1.

Amounts brought forward from Step 2 – which concerns the restriction to the net value of the set-off amount – are applied in discharging the corporation tax liability of the company for future accounting periods and under s104O(5) this offset specifically applies before Step 1 amounts of the current period. This same rule also applies to Step 2 restricted amounts surrendered to a group company under s104O(3). The form CT600L however does not provide a box for these amounts to be entered and e-filing validation rules meant that Step 1 amounts had to be offset first, leaving no way for Step 2 amounts brought forward to be prioritised in line with legislative rules.

A result was that relief given could be reduced in some scenarios where the total RDEC to be offset was greater than corporation tax chargeable. This can be illustrated with the following example, where the RDEC credit in the period is £650k – with the net value of the set-off amount as reduced by CT at 19% then being £526,500 – and there is a Step 2 amount brought forward present of £200k.
The order of offset specified by the legislation – s104O(5) states that the step 2 deduction applies first – is as follows:

Corporation tax chargeable 190,000.00
R&D expenditure credits - step 2 amount brought forward, s104O(2) CTA 2009 190,000.00
R&D expenditure credits - step 7 payable amount, s104N CTA 2009 526,500.00
Total R&D expenditure credits 716,500.00

The Step 2 amount brought forward is offset against, and extinguishes, the corporation tax liability first leaving no Step 1 offset available. However, the current period credit (restricted to the net value of set-off amount) is payable to the company under Step 7. Effective relief totals £716,500.
This contrasts with the offset required initially by the e-filing schema applied to the CT600L, where Step 1 had to be offset first:

Corporation tax chargeable 190,000.00
R&D expenditure credits - step 2 amount brought forward, s104O(2) CTA 2009 190,000.00
R&D expenditure credits - step 7 payable amount, s104N CTA 2009 460,000.00
Total R&D expenditure credits 650,000.00


Since the corporation tax liability is now fully utilised by the Step 1 offset, and the Step 2 brought forward offset is restricted to such liability, no relief is available for the latter. The effect is that overall relief for the period is reduced. It should be noted that the full Step 2 amount remains to be carried forward here and so the overall relief available will be unchanged, but a timing issue is created with relief delayed.

Similarly, amounts brought forward from Step 3 – the restriction to total expenditure on workers – are treated as a credit of the following period under the wording of s104N(2). Whilst the CT600L does provide box L20 for these amounts to be entered, the e-filing validation rules initially applied to box L65 meant that where such an amount was not offset under Step 1, it was converted back to a carried forward amount under Step 2 rather than being available for the remaining steps 3-7.

We first added support for the CT600L in our V20.1 release of Alphatax and at that time, we changed our existing calculation to match the rules specified by HMRC in this area to avoid e-filing failures. We also provided a Disapply changes to the order of RDEC credit offset against CT liability made to satisfy e-filing validation rules from 1 April 2021? [computation will not be able to be e-filed] flag in the Submission options input statement which was intended to be used for any customers who wanted to discuss paper filing with HMRC.

What has been addressed?

HMRC partially addressed these issues in an update to their e-filing schema and guidance in May 2021 which we were able to support in our V21.0 release of Alphatax. 
In respect of Step 2 amounts brought forward, the Company tax return guide was updated to advise that these should be entered in box L20 along with Step 3 brought forward amounts:
 

L20 - Amounts from a previous accounting period treated as RDEC for this accounting period

 

The relevant offset against corporation tax can then be reflected in box L45 whilst satisfying existing validation rules. For Step 3 amounts brought forward, the validation rule that was previously applied to box L65 was removed allowing for unrelieved amounts to now be carried through to steps 3-7. For the example above, the CT600L is now completed as follows with the Step 2 amount brought forward included in box L20:

Calculation of R&D expenditure credit

 

Box L140 includes both the current period Step 2 restriction of £123,500 and the remaining brought forward amount that has not been used of £10,000:

RDEC carried forward

 

What is still potentially confusing?

The amendments introduced by HMRC allow for the correct credit to be claimed against corporation tax in each of these cases. However, the boxes on the form were not changed and so these amounts still must be included in the Step 1 section and the resulting presentation has been causing some confusion for reviewers.

For step 2, the narrative for box L20 does not agree to the correct legislative treatment for these Step 2 amounts brought forward; they are offset directly against any corporation tax liability rather than being “treated as RDEC” of the period in the same way as Step 3 amounts brought forward. Additionally, to stop the form from carrying these amounts through steps 2-7, only the part of the Step 2 amount brought forward that is offset against corporation tax in the period can be entered in box L20, not the full amount available. The unrelieved part is returned in box L140 – Balance carried forward to next accounting period (AP) – together with any current period Step 2 restriction which breaks the rubric on the form (as can be seen in the image above).

For Step 3 amounts brought forward, in our view, HMRC have removed a validation rule that was correct, and they should instead have considered the rule for box L60 where the form and validation continue to incorrectly reference box L15 only. Box L60 is now not meaningful where brought forward amounts are present.

Updates for CT600 2022

HMRC published an updated e-filing schema for the CT600 2022 on their website in September. We presently await sight of the corresponding tax return PDF, but analysis of the schema indicates that a new “Pre Step 1 Restriction” section is to be included before the existing “Step 1” to reflect the amount of any step 2 restriction brought forward from a previous accounting period offset against corporation tax liability of the period. The presentation issue whereby Step 2 and Step 3 amounts brought forward are presented in the same box is therefore to be resolved.

A further amendment indicated by the schema is the introduction of an Amounts extinguished by s104S(2)(b) box L123 before the amount payable at Step 7, which will now allow the RDEC claim to be extinguished where the company is not a going concern. The CT600L currently does not allow this legislative rule to be reflected and so business must exclude expenditure from the form entirely where s104S would be relevant. Having raised this point with HMRC, we had to suppress the corresponding input in Alphatax whilst we awaited further clarification.

Finally, the SME section is being extended to add additional details concerning any claim including whether the recently introduced cap under s1058 CTA 2009 applies, and details of the PAYE liabilities and PAYE employer reference of the company. This schema will be introduced by HMRC into the live service in April 2022 alongside the new version of the tax return form. We intend to introduce support for this form in our V22.0 release which will be due in Q2 2022.

Conclusion

The addition of the CT600L supplementary pages and associated e-filing rules have been designed and implemented by HMRC to make sure that RDEC credits are calculated and allocated correctly by all claimants. The introduction of this form largely went smoothly with most issues addressed already or to be resolved in the 2022 update to the CT600. Until then, a little understanding of the presentation issues is needed when reviewing the company tax return for companies with a Step 2 or Step 3 amount brought forward.