Multinational Top-up Tax and Domestic Top-up Tax

MTT21410 - Calculating the effective tax rate: Adjusted profits: Qualifying refundable tax credits

In the adjusted profits, qualifying refundable tax credits are to be treated as income. Where a member has received qualifying refundable tax credits, the underlying profits are to be adjusted so that these items are reflected in the adjusted profits to the extent they have not been already.

The definition of a qualifying refundable tax credit is set out in section 148 of Finance (No.2) Act 2023.

Refundable tax credit

A ‘refundable tax credit’ is a tax credit which is payable in cash (or cash equivalents) after any liability to covered taxes has been reduced or discharged by it.

A cash equivalent includes the discharge of the tax credit against a liability to a non-covered tax.

Qualifying refundable tax credit

A refundable tax credit is ‘qualifying’ where the recipient is entitled to receive payment within 4 years of meeting the conditions for receiving it.

Refundable tax credit relating to a refundable imputation tax

A refundable tax credit is not qualifying if it is creditable or refundable pursuant to a refundable imputation tax, whether or not that tax is qualified or disqualified (see MTT25230).

Application to the UK’s expenditure credit regimes

HMRC’s view is the full amount of a tax credit claimed under one of the UK’s expenditure credit regimes, such as the Research and Development Expenditure Credit (RDEC), is entirely a qualifying refundable tax credit.  This is on the basis that it is inappropriate to consider whether an amount is qualifying or not on a case-by-case basis. The OECD Commentary to the Model Rules, in describing Qualifying Refundable Tax Credits (QRTC), includes language considering the design of the regime and it is explicit that the determination of whether a tax credit is a QRTC should not be made depending on the outcomes for a specific taxpayer. There is therefore no support in a view that sees different outcomes under s148 depending on the specific circumstances of the taxpayer.

This analysis is supported by the amount of tax credit a company is entitled to being determined first and then separately the legislation explaining how that credit is paid and made available to the claimant.

Therefore, having determined the amount of the tax credit, the first question then is whether there is anything within the rules determining the method by which the credit is made available to the claimant that prevents an element of the tax credit being considered as refundable.  The UK’s rules require the tax credit to discharge any of the claimant’s liability for the CT due for the period before anything else is considered. The next step then ensures that any liability for the CT due on the tax credit itself is met. This can be done by either, an element equivalent to the outstanding liability to be used against the CT liability of the claimant in a later period, or as an alternative for it to be used to discharge the CT liability of a group member in the same period.  These steps, therefore, work in tandem to ensure that in all circumstances the tax credit is used to discharge an amount equivalent to the tax liability arising on the credit itself. Although, typically, the total CT liability of the claimant may be less than the liability on the credit itself due to the claimant being loss making in the period, this may also apply when the claimant is in a profit situation, such as where it has tax losses carried forward.

Further steps require the claimant to first, discharge the claimant’s CT liability of another period, and then allows the ability to discharge the CT liability of a group member. The four methods of utilising the credit are all of a similar nature in requiring, or allowing in the period, the tax credit to be used to discharge liabilities of a covered tax.  This discharge of covered taxes, but allowing and anticipating an amount that will be paid by way of cash or cash equivalent means that the tax credit should be considered refundable within the meaning of s148.

The RDEC regime also removes the claimant’s entitlement to the credit for a period to the extent the credit is, broadly, in excess of the expenditure on workers’ PAYE and NICs of the period. As the entitlement to this amount is removed for this period it should not be considered an element of refundable tax credit for the period.

As the amount available to be paid in cash or cash equivalent is fully a refundable tax credit, and as none of the amount the claimant is entitled to is delayed, the full amount is a qualifying refundable tax credit.