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      The Government has announced a targeted change to the interaction between expenditure credits and corporation tax Quarterly Instalment Payments (QIPs). From 1 April 2027, companies will be able to exclude certain expenditure credit income when determining whether they fall within the QIP regime.

      While the measure aims to address unintended cash flow impacts for some businesses, its overall scope is relatively narrow and is unlikely to benefit larger companies already within QIPs.

      Background – how expenditure credits interact with QIPs

      Under the current rules, expenditure credits such as Research & Development Expenditure Credits (RDEC), Audio-Visual Expenditure Credits (AVEC) and Video Games Expenditure Credits (VGEC) are treated as taxable income. This treatment increases a company’s taxable profits and, crucially, the ‘augmented profits’ figure used to determine whether it exceeds the thresholds for entry into the QIP regime. As a result:

      • Companies can be brought into QIPs purely because of claiming expenditure credits;
      • This can accelerate corporation tax payment timings, requiring tax to be paid in instalments during the accounting period rather than after year end; and
      • For some businesses, this creates a mismatch between the receipt of credit cashflows and the timing of tax payments.

      In practice, this has been particularly problematic for companies in the creative and R&D-intensive sectors, where expenditure credits can be material relative to underlying trading profits.

      Carol Johnson
      Carol Johnson

      Tax Partner - Innovation Incentives

      KPMG in the UK

      Peter Chapman
      Peter Chapman

      Tax Partner

      KPMG in the UK

      The issue – unintended cash flow and administrative burdens

      The inclusion of expenditure credit income in the QIP threshold calculation has led to the following key challenges:

      • Unintended entry into QIPs - Businesses with relatively modest underlying profits may cross the QIP thresholds solely due to recognising credit income;
      • Cash flow strain - Although expenditure credits provide value, they do not always align with the timing of tax payments. Companies may therefore need to fund earlier tax instalments before fully benefiting from the credits; and
      • Increased administrative complexity - Entering the QIP regime brings additional forecasting, compliance and instalment calculation requirements.

      HMRC have acknowledged that this outcome does not align with the policy intent of the expenditure credit regimes, which are designed to incentivise investment rather than create upfront tax payment pressures. 

      The proposed solution – exclusion from augmented profits

      To address this, the Government proposes to amend the definition of ‘augmented profits’ for QIP purposes through secondary legislation. From 1 April 2027:

      • Income arising from RDEC, AVEC and VGEC will no longer be included when determining whether a company exceeds the QIP thresholds;
      • This means companies will not be brought into QIPs solely as a result of claiming these credits; and
      • The measure is intended to reduce administrative burdens and ease cash flow pressures for affected businesses.

      In effect, the change separates the incentive mechanism (the credit) from the payment timing mechanism (QIPs) for threshold purposes.

      Practical impact – who benefits?

      The change is expected to benefit:

      • Mid-sized and growing businesses close to the QIP thresholds;
      • Companies in creative and R&D-intensive sectors where credits materially inflate accounting profits; and
      • Businesses that would otherwise be pulled into QIPs earlier than anticipated.

      However, the measure does not change the underlying tax treatment of the credits themselves, which will continue to be recognised as taxable receipts.

      Comment – a step forward, but limited in scope

      The proposal is a welcome acknowledgement of the distortive impact that expenditure credits can have on QIP thresholds. It should deliver a meaningful simplification for affected mid-market businesses and reduce unintended compliance burdens.

      However, the measure falls short of a more fundamental reform. In particular:

      • It does not improve the position for businesses already within QIPs;
      • It does not address the timing mismatch between credit recognition and tax payments; and
      • It stops at the threshold test, rather than reconsidering how credits interact with instalment calculations more broadly.

      In our view, there was an opportunity for the Government to go further—potentially by allowing expenditure credits to be recognised more directly in QIP calculations or by aligning payment timing more closely with credit realisation.

      What should businesses do now?

      Although the change only takes effect from April 2027, businesses should

      • Monitor whether they are currently close to QIP thresholds due to credit income;
      • Consider the impact of the change on future tax payment profiles and forecasts; and
      • Continue to manage QIP cashflow carefully where already within the regime.

      For further information please contact:

       

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