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Finance (No. 2) BillPage 240

(5) See sections 1124, 1126 and 1132 for provision about when particular
kinds of expenditure are attributable to relevant research and
development.

SMEs: subsidised qualifying expenditure
104F 5Subsidised qualifying expenditure

For the purposes of this Chapter a company’s “subsidised qualifying
expenditure” means—

(a) its subsidised qualifying expenditure on in-house direct
research and development (see section 104G), and

(b) 10its subsidised qualifying expenditure on contracted out
research and development (see section 104H).

104G Subsidised qualifying expenditure on in-house direct R&D

(1) A company’s “subsidised qualifying expenditure on in-house direct
research and development” means expenditure incurred by it in
15relation to which each of conditions A to D is met.

(2) Condition A is that the expenditure is subsidised.

(3) Condition B is that the expenditure is—

(a) incurred on staffing costs (see section 1123),

(b) incurred on software or consumable items (see section 1125),

(c) 20qualifying expenditure on externally provided workers (see
section 1127), or

(d) incurred on relevant payments to the subjects of a clinical
trial (see section 1140).

(4) Condition C is that the expenditure is attributable to relevant
25research and development undertaken by the company itself.

(5) Condition D is that the expenditure is not incurred by the company
in carrying on activities which are contracted out to the company by
any person.

(6) See sections 1124, 1126 and 1132 for provision about when
30expenditure within subsection (3)(a), (b) or (c) is attributable to
relevant research and development.

104H Subsidised qualifying expenditure on contracted out R&D

(1) A company’s “subsidised qualifying expenditure on contracted out
research and development” means expenditure—

(a) 35which is incurred by it in making the qualifying element of a
sub-contractor payment (see sections 1134 to 1136), and

(b) in relation to which each of conditions A to E is met.

(2) Condition A is that the expenditure is subsidised.

(3) Condition B is that the sub-contractor is—

(a) 40a qualifying body,

(b) an individual, or

(c) a firm, each member of which is an individual.

Finance (No. 2) BillPage 241

(4) Condition C is that the body, individual or firm concerned
undertakes the contracted out research and development itself.

(5) Condition D is that the expenditure is attributable to relevant
research and development in relation to the company.

(6) 5Condition E is that the expenditure is not incurred by the company
in carrying on activities which are contracted out to the company by
any person.

(7) See sections 1124, 1126 and 1132 for provision about when particular
kinds of expenditure are attributable to relevant research and
10development.

SMEs: capped R&D expenditure
104I Capped R&D expenditure

For the purposes of this Chapter a company’s “capped R&D
expenditure” means any expenditure—

(a) 15in respect of which the company is not entitled to relief under
Chapter 2 of Part 13 merely because of section 1113 (cap on
R&D aid),

(b) which is not qualifying expenditure on sub-contracted R&D,
and

(c) 20which would have been qualifying R&D expenditure had the
company been a large company throughout the accounting
period in question.

Large companies: qualifying R&D expenditure
104J Qualifying expenditure on in-house direct R&D

(1) 25A company’s “qualifying expenditure on in-house direct research
and development” means expenditure incurred by it in relation to
which conditions A, B and C are met.

(2) Condition A is that the expenditure is—

(a) incurred on staffing costs (see section 1123),

(b) 30incurred on software or consumable items (see section 1125),

(c) qualifying expenditure on externally provided workers (see
section 1127), or

(d) incurred on relevant payments to the subjects of a clinical
trial (see section 1140).

(3) 35Condition B is that the expenditure is attributable to relevant
research and development undertaken by the company itself.

(4) Condition C is that, if the expenditure is incurred in carrying on
activities contracted out to the company, the activities are contracted
out by—

(a) 40a large company, or

(b) any person otherwise than in the course of carrying on a
chargeable trade.

(5) A “chargeable trade” is—

Finance (No. 2) BillPage 242

(a) a trade, profession or vocation carried on wholly or partly in
the United Kingdom, the profits of which are chargeable to
income tax under Chapter 2 of Part 2 of ITTOIA 2005, or

(b) a trade carried on wholly or partly in the United Kingdom,
5the profits of which are chargeable to corporation tax under
Chapter 2 of this Part.

(6) See sections 1124, 1126 and 1132 for provision about when
expenditure within subsection (2)(a), (b) or (c) is attributable to
relevant research and development.

104K 10Qualifying expenditure on contracted out R&D

(1) A company’s “qualifying expenditure on contracted out research
and development” means expenditure incurred by it in relation to
which each of conditions A to D is met.

(2) Condition A is that the expenditure is incurred in making payments
15to—

(a) a qualifying body,

(b) an individual, or

(c) a firm, each member of which is an individual,

in respect of research and development contracted out by the
20company to the body, individual or firm concerned (“the contracted
out R&D”).

(3) Condition B is that the body, individual or firm concerned
undertakes the contracted out R&D itself.

(4) Condition C is that the expenditure is attributable to relevant
25research and development in relation to the company.

(5) Condition D is that, if the contracted out R&D is itself contracted out
to the company, it is contracted out by—

(a) a large company, or

(b) any person otherwise than in the course of carrying on a
30chargeable trade.

(6) A “chargeable trade” is—

(a) a trade, profession or vocation carried on wholly or partly in
the United Kingdom, the profits of which are chargeable to
income tax under Chapter 2 of Part 2 of ITTOIA 2005, or

(b) 35a trade carried on wholly or partly in the United Kingdom,
the profits of which are chargeable to corporation tax under
Chapter 2 of this Part.

(7) See sections 1124, 1126 and 1132 for provision about when particular
kinds of expenditure are attributable to relevant research and
40development.

104L Qualifying expenditure on contributions to independent R&D

(1) A company’s “qualifying expenditure on contributions to
independent research and development” means expenditure
incurred by it in relation to which each of conditions A to E is met.

(2) 45Condition A is that the expenditure is incurred in making payments
to—

Finance (No. 2) BillPage 243

(a) a qualifying body,

(b) an individual, or

(c) a firm, each member of which is an individual,

for the purpose of funding research and development carried on by
5the body, individual or firm concerned (“the funded R&D”).

(3) Condition B is that the funded R&D is relevant research and
development in relation to the company.

(4) Condition C is that the funded R&D is not contracted out to the
qualifying body, individual or firm concerned by another person.

(5) 10Condition D is that, if the payment is made to an individual, the
company is not connected with the individual when the payment is
made.

(6) Condition E is that, if the payment is made to a firm (other than a
qualifying body), the company is not connected with any member of
15the firm when the payment is made.

Amount of credit
104M Amount of R&D expenditure credit

(1) The amount of the R&D expenditure credit to which a company is
entitled for an accounting period is the relevant percentage of the
20amount of the company’s qualifying R&D expenditure for the
period.

(2) In the case of a ring fence trade, the relevant percentage is 49%.

In this subsection “ring fence trade” has the meaning given by
section 277 of CTA 2010.

25In this subsection “ring fence trade” has the meaning given by
section 277 of CTA 2010.

(3) In any other case, the relevant percentage is 10%.

(4) The Treasury may by order replace the percentage for the time being
specified in subsection (2) or (3) with a different percentage.

(5) 30An order under subsection (4) may contain incidental, supplemental,
consequential and transitional provision and savings.

Payment of credit
104N Payment of R&D expenditure credit

(1) This section applies if a company is entitled to an R&D expenditure
35credit for an accounting period under this Chapter.

(2) The amount to which the company is entitled in respect of the R&D
expenditure credit (“the set-off amount”) is to be treated in the
following way—

Step 1

40The set-off amount is to be applied in discharging any liability of the
company to pay corporation tax for the accounting period.

If any of the set-off amount is remaining, go to step 2.

Step 2

If the amount remaining after step 1 is greater than the company’s
45total expenditure on workers for the accounting period (see section
104O)—

(a) that amount is to be reduced to the amount of that
expenditure (which may be nil), and

(b) so much of the amount remaining after step 1 as is greater
50than the amount of that expenditure is to be treated for the
purposes of this section as an amount of R&D expenditure
credit to which the company is entitled for its next accounting
period.

If any of the set-off amount is remaining, go to step 3.

55Step 3

The amount remaining after step 2 is to be applied in discharging any
liability of the company to pay corporation tax for any other
accounting period.

If any of the set-off amount is remaining, go to step 4.

60Step 4

If the company is a member of a group, it may surrender the whole
or any part of the amount remaining after step 3 to any other member
of the group (see section 104Q).

If no such surrender is made, or any of the set-off amount is
65otherwise remaining, go to step 5.

Step 5

Deduct from the amount remaining after step 4 the following
amounts—

(a) an amount equal to the corporation tax that would be
70chargeable on the amount if it was an amount of profits (or in
the case of a ring fence trade, ring fence profits) of the
company for the accounting period and corporation tax on
such profits was chargeable at the main rate, and

(b) in the case of a ring fence trade, an amount equal to the
75supplementary charge that would be chargeable on the
amount if it was an amount of adjusted ring fence profits for
the accounting period.

For provision about the treatment of any amount so deducted, see
section 104R.

80Step 6

The amount remaining after step 5 is to be applied in discharging any
other liability of the company to pay a sum to the Commissioners
under or by virtue of an enactment or under a contract settlement.

If any of the set-off amount is remaining, go to step 7.

85Step 7

The amount remaining after step 6 is payable to the company by an
officer of Revenue and Customs.

But this is subject to section 104S (restrictions on payment of R&D
expenditure credit).

Finance (No. 2) BillPage 244

Finance (No. 2) BillPage 245

(3) In this section—

104O Total expenditure on workers

(1) For the purposes of section 104N, the amount of a company’s total
15expenditure on workers for an accounting period is the sum of—

(a) the relevant portion of the company’s staffing costs for the
period (see subsection (2)), and

(b) if the company is a member of a group and has incurred
expenditure on any externally provided workers, the
20relevant portion of any staffing costs for the period incurred
by another member of the group (the “relevant group
company”) in providing any of those workers for the
company (see subsection (3)).

(2) The relevant portion of the company’s staffing costs for an
25accounting period is the amount of those costs that—

(a) are paid to, or in respect of, directors or employees who are
directly and actively engaged in relevant research and
development (whether they are wholly or partly so engaged),
and

(b) 30form part of the total amount of the company’s PAYE and
NIC liabilities for the accounting period (see section 104P).

(3) The relevant portion of any staffing costs for an accounting period
incurred by a relevant group company in providing externally
provided workers for the company is the sum of the amounts to be
35determined in the case of each of those workers as follows—

Step 1

Calculate the amount of expenditure that—

(a) has been incurred by the relevant group company in
providing the externally provided worker for the company,

(b) 40has been incurred on staffing costs, and

(c) forms part of the total amount of the relevant group
company’s PAYE and NIC liabilities for the accounting
period (see section 104P).

Step 2

45Calculate the percentage (the “appropriate percentage”) given by—


where—

  • R is the amount of the company’s qualifying expenditure on the
    externally provided worker that has been taken into account
    50in calculating the amount of the company’s qualifying R&D
    expenditure for the period, and

  • T is the total amount of the company’s qualifying expenditure
    on the externally provided worker.

Finance (No. 2) BillPage 246

Step 3

The amount to be determined in the case of the externally provided
worker is the appropriate percentage of the amount given by step 1.

104P Total amount of company’s PAYE and NIC liabilities

(1) 5For the purposes of section 104O the total amount of a company’s
PAYE and NIC liabilities for an accounting period is the sum of—

(a) amount A, and

(b) amount B.

(2) Amount A is the total amount of income tax for which the company
10is required to account to an officer of Revenue and Customs under
PAYE regulations for the accounting period.

(3) In calculating amount A disregard any deduction the company is
authorised to make in respect of child tax credit or working tax
credit.

(4) 15Amount B is the total amount of Class 1 national insurance
contributions for which the company is required to account to an
officer of Revenue and Customs for the accounting period.

(5) In calculating amount B disregard any deduction the company is
authorised to make in respect of payments of statutory sick pay,
20statutory maternity pay, child tax credit or working tax credit.

(6) In a case where the company is required to account for any amount
of income tax or Class 1 national insurance contributions for a
payment period that does not fall wholly within the accounting
period, the portion of that amount to be included in the total amount
25of the company’s PAYE and NIC liabilities for the accounting period
is to be determined on such basis as is just and reasonable in all the
circumstances.

104Q Surrender of credit to other group companies

(1) This section applies if—

(a) 30a company is entitled to an R&D expenditure credit under
this Chapter for an accounting period (“the surrender
period”), and

(b) the company surrenders the whole or any part of the credit to
another member of the group (the “relevant group member”)
35under step 4 in section 104N(2).

(2) In this section an accounting period of a relevant group member is a
“relevant accounting period” if there is a period (“the overlapping
period”) that is common to the accounting period and the surrender
period.

Finance (No. 2) BillPage 247

(3) The amount surrendered is to be applied in discharging any liability
of the relevant group member to pay corporation tax for any relevant
accounting period as follows—

Step 1

5Take the proportion of the relevant accounting period included in
the overlapping period.

Apply that proportion to the amount of corporation tax payable by
the relevant group member for the relevant accounting period.

Step 2

10Take the proportion of the surrender period included in the
overlapping period.

Apply that proportion to the amount surrendered to the relevant
group member.

Step 3

15The amount given by step 2 is to be applied in discharging the
amount given by step 1.

(4) If any of the amount surrendered is remaining after the operation of
step 3 in subsection (3), it is to be treated for the purposes of section
104N as if it had not been surrendered to the relevant group member.

(5) 20The surrender by a company of the whole or any part of an R&D
expenditure credit to another company under step 4 in section
104N(2)—

(a) is not to be taken into account in determining the profits or
losses of either company for corporation tax purposes, and

(b) 25for corporation tax purposes is not to be regarded as the
making of a distribution.

104R Payment of credit net of tax

(1) This section applies if—

(a) a company is entitled to an R&D expenditure credit for an
30accounting period under this Chapter, and

(b) an amount (“the step 5 amount”) is deducted in respect of the
credit under step 5 in section 104N(2).

(2) The step 5 amount is to be applied in discharging any liability of the
company to pay corporation tax for any subsequent accounting
35period.

This is subject to subsection (3).

This is subject to subsection (3).

(3) If the company is a member of a group, it may surrender the whole
or any part of the step 5 amount to any other member of the group
40(the “relevant group member”).

In such a case, section 104Q(3) applies to the amount surrendered as
it applies to an amount of R&D expenditure credit surrendered
under step 4 in section 104N(2).

In such a case, section 104Q(3) applies to the amount surrendered as
45it applies to an amount of R&D expenditure credit surrendered
under step 4 in section 104N(2).

(4) If any of the amount surrendered under subsection (3) is remaining
after the operation of step 3 in section 104Q(3), it is to be treated for
the purposes of section 104N as if it had not been surrendered to the
50relevant group member.

Finance (No. 2) BillPage 248

(5) Any amounts to be applied under subsection (2) or (3) in discharging
any liability of a company to pay corporation tax for an accounting
period are to be so applied before any amounts that may be so
applied under step 1, 3 or 4 in section 104N(2).

(6) 5The surrender by a company of the whole or any part of the step 5
amount to another company under this section—

(a) is not to be taken into account in determining the profits or
losses of either company for corporation tax purposes, and

(b) for corporation tax purposes is not to be regarded as the
10making of a distribution.

104S Restrictions on payment of R&D expenditure credit

(1) This section applies if—

(a) a company is entitled to an R&D expenditure credit for an
accounting period under this Chapter, and

(b) 15an amount of the R&D expenditure credit is payable to the
company under step 7 of section 104N(2).

(2) If at the time of claiming the credit the company was not a going
concern (see section 104T)—

(a) the company is not entitled to be paid that amount, and

(b) 20that amount is extinguished.

(3) But if the company becomes a going concern on or before the last day
on which an amendment of the company’s tax return for the
accounting period could be made under paragraph 15 of Schedule 18
to FA 1998, the company is entitled to be paid that amount.

(4) 25If the company’s tax return for the accounting period is enquired into
by an officer of Revenue and Customs—

(a) no payment of that amount need be made before the officer’s
enquiries are completed (see paragraph 32 of Schedule 18 to
FA 1998), but

(b) 30the officer may make a payment on a provisional basis of
such amount as the officer thinks fit.

(5) No payment of that amount need be made if the company has
outstanding PAYE and NIC liabilities for the period.

(6) A company has outstanding PAYE and NIC liabilities for an
35accounting period if it has not paid to an officer of Revenue and
Customs any amount that it is required to pay—

(a) under PAYE regulations, or

(b) in respect of Class 1 national insurance contributions,

for payment periods ending in the accounting period.

104T 40“Going concern”

(1) For the purposes of section 104S(2) and (3) a company is a going
concern if—

(a) its latest published accounts were prepared on a going
concern basis, and

(b) 45nothing in those accounts indicates that they were only
prepared on that basis because of an expectation that the

Finance (No. 2) BillPage 249

company would receive R&D expenditure credits under this
Chapter.

This is subject to subsection (2).

(2) A company is not a going concern at any time if it is in administration
5or liquidation at that time.

(3) For the purposes of this section a company is in administration if—

(a) it is in administration under Part 2 of the Insolvency Act 1986
or Part 3 of the Insolvency (Northern Ireland) Order 1989 (S.I.
1989/2405 (N.I. 19)), or

(b) 10a corresponding situation under the law of a country or
territory outside the United Kingdom exists in relation to the
company.

(4) For the purposes of this section a company is in liquidation if—

(a) it is in liquidation within the meaning of section 247 of that
15Act or Article 6 of that Order, or

(b) a corresponding situation under the law of a country or
territory outside the United Kingdom exists in relation to the
company.

(5) Section 436(2) of the Companies Act 2006 (meaning of “publication”
20of documents) has effect for the purposes of this section.

Insurance companies
104U Insurance companies treated as large companies

(1) This section applies if an insurance company—

(a) carries on life assurance business in an accounting period,
25and

(b) is a small or medium-sized enterprise in the period.

(2) For the purposes of this Chapter the company is to be treated as if it
were not such an enterprise in the period (and accordingly is to be
treated as a large company for the purposes of this Chapter).

(3) 30Section 1119 (meaning of “small or medium-sized enterprise”), as it
has effect for the purposes of this Chapter (see section 104Y), is to be
read subject to this section.

104V Entitlement to credit: I minus E basis

(1) This section applies if—

(a) 35for an accounting period, an insurance company is charged to
tax in respect of its basic life assurance and general annuity
business in accordance with the I-E rules, and

(b) the calculation of the company’s charge to tax for the period
in respect of that business does not involve the calculation of
40any BLAGAB trade profit or loss of the company.

(2) Section 104A has effect as if—

(a) the reference in subsection (1) to calculating the profits of a
trade were a reference to calculating the I-E profit of the basic
life assurance and general annuity business carried on by the
45company, and

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