Corporation Tax Bill

House of Commons

Session 2008 - 09
Internet Publications
Other Bills before Parliament

Corporation Tax Bill

Corporation Tax Bill
Part 13 — Additional relief for expenditure on research and development
Chapter 2 — Relief for SMEs: cost of R&D incurred by SME
491

(b)
makes, or is treated as making, a trading loss.
(8)
Chapter 8 contains provision limiting the amount of relief available under
Chapter 2 or 7 in relation to expenditure on a particular research and
development project.
(9)
Chapter 9 contains supplementary provision, including definitions.
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(10)
For information about the procedure for making claims under this Part see
Schedule 18 to FA 1998, in particular Part 9A of that Schedule (claims for R&D
tax reliefs).
1040
Relief may be available under more than one Chapter of Part
Expenditure may be eligible for relief under more than one Chapter of this
10
Part.
Interpretation
1041
“Research and development”
In this Part “research and development” has the meaning given by section
837A of ICTA.
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1042
“Relevant research and development”
(1)
In this Part “relevant research and development”, in relation to a company,
means research and development—
(a)
related to a trade carried on by the company, or
(b)
from which it is intended that a trade to be carried on by the company
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will be derived.
(2)
Research and development related to a trade carried on by a company
includes—
(a)
research and development which may lead to or facilitate an extension
of the trade, and
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(b)
research and development of a medical nature which has a special
relation to the welfare of workers employed in the trade.
(3)
But any reference to “relevant research and development” which applies for
the purposes of Chapter 7 (relief for SMEs and large companies: vaccine
research etc) is to be read as if subsection (2)(b) were omitted.
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Chapter 2
Relief for SMEs: cost of R&D incurred by SME
Introductory
1043
Overview of Chapter
(1)
This Chapter provides for relief for companies which are small or medium-
35
sized enterprises for expenditure on—
(a)
in-house direct research and development, or

Corporation Tax Bill
Part 13 — Additional relief for expenditure on research and development
Chapter 2 — Relief for SMEs: cost of R&D incurred by SME
492

(b)
contracted out research and development,

where the cost of the research and development is incurred by the company.
(2)
The reliefs available are—
(a)
an additional deduction under section 1044, or
(b)
a deemed trading loss under section 1045.
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(3)
Sections 1046 to 1053 contain provision relevant to the reliefs available under
this Chapter, namely—
(a)
provision preventing a company from making a claim or election for
relief if it is not a going concern (see section 1046),
(b)
information about elections under section 1045 for a deemed trading
10
loss (see section 1047),
(c)
information about the treatment of a deemed trading loss (see section
1048),
(d)
a restriction on consortium relief where relief is obtained (see section
1049),
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(e)
provision about when a company meets the R&D threshold for the
purposes of obtaining relief (see section 1050), and
(f)
provision about when a company’s expenditure is “qualifying Chapter
2 expenditure” for those purposes (see sections 1051 to 1053).
(4)
Sections 1054 to 1062 deal with R&D tax credits which can be claimed if a
20
company—
(a)
obtains relief under this Chapter, and
(b)
makes, or is treated as making, a trading loss.
Reliefs
1044
Additional deduction in calculating profits of trade
25
(1)
A company is entitled to corporation tax relief for an accounting period if it
meets each of conditions A to D.
(2)
Condition A is that the company is a small or medium-sized enterprise in the
period.
(3)
Condition B is that the company meets the R&D threshold in the period (see
30
section 1050).
(4)
Condition C is that the company carries on a trade in the period.
(5)
Condition D is that the company has qualifying Chapter 2 expenditure which
is allowable as a deduction in calculating for corporation tax purposes the
profits of the trade for the period.
35
(6)
For the company to obtain the relief it must make a claim.

See section 1046 (which prevents a company from making a claim if it is not a
going concern).
(7)
The relief is an additional deduction in calculating the profits of the trade for
the period.
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(8)
The amount of the additional deduction is 75% of the qualifying Chapter 2
expenditure.

Corporation Tax Bill
Part 13 — Additional relief for expenditure on research and development
Chapter 2 — Relief for SMEs: cost of R&D incurred by SME
493

(9)
This section is subject to section 1113 (cap on R&D aid in relation to a particular
research and development project).
(10)
For the meaning of “qualifying Chapter 2 expenditure” see section 1051.
1045
Alternative treatment for pre-trading expenditure: deemed trading loss
(1)
A company is entitled to corporation tax relief for an accounting period if it
5
meets conditions A, B and C.
(2)
Condition A is that the company is a small or medium-sized enterprise in the
period.
(3)
Condition B is that the company meets the R&D threshold in the period (see
section 1050).
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(4)
Condition C is that the company has incurred qualifying Chapter 2
expenditure in the period which—
(a)
is not allowable as a deduction in calculating for corporation tax
purposes the profits of a trade carried on by it at the time the
expenditure was incurred, but
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(b)
would have been so allowable had it, at that time, been carrying on a
trade consisting of the activities in respect of which the expenditure
was incurred.
(5)
For the company to obtain the relief it must make an election.

See section 1046 (which prevents a company from making an election if it is not
20
a going concern).
(6)
The relief is that the company is treated as if it had made a trading loss in the
period.
(7)
The trading loss is equal to 175% of the qualifying Chapter 2 expenditure.
(8)
If a company makes an election under this section in respect of qualifying
25
Chapter 2 expenditure, section 61 (pre-trading expenses) does not apply to the
expenditure.
(9)
This section is subject to section 1113 (cap on R&D aid in relation to a particular
research and development project).
(10)
For the meaning of “qualifying Chapter 2 expenditure” see section 1051.
30
(11)
See also section 1137, which makes provision about the accounting periods of
a company which is not within the charge to corporation tax.
Reliefs: further provision
1046
Relief only available where company is going concern
(1)
A company may only make—
35
(a)
a claim under section 1044, or
(b)
an election under section 1045,

at a time when it is a going concern.
(2)
For the purposes of this section a company is a going concern if—

Corporation Tax Bill
Part 13 — Additional relief for expenditure on research and development
Chapter 2 — Relief for SMEs: cost of R&D incurred by SME
494

(a)
its latest published accounts were prepared on a going concern basis,
and
(b)
nothing in those accounts indicates that they were only prepared on
that basis because of an expectation that the company would receive
relief or R&D tax credits under this Chapter or Chapter 7.
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(3)
Section 436(2) of the Companies Act 2006 (meaning of “publication” of
documents) has effect for the purposes of this section.
1047
Elections under section 1045
(1)
An election under section 1045 must specify the accounting period in respect
of which it is made.
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(2)
The election must be made by notice in writing to an officer of Revenue and
Customs.
(3)
The notice must be given before the end of the period of two years beginning
immediately after the end of the accounting period to which the election
relates.
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1048
Treatment of deemed trading loss under section 1045
(1)
This section applies if under section 1045 a company is treated as making a
trading loss in an accounting period.
(2)
The trading loss may not be set off against profits of a preceding accounting
period under section 393A(1)(b) or 393B(3) of ICTA unless the company is
20
entitled to relief under section 1045 for the earlier period.
(3)
Subsection (4) applies if—
(a)
the company begins, in the accounting period or a later period, to carry
on a trade, and
(b)
the trade is derived from the research and development in relation to
25
which the relief mentioned in subsection (1) was obtained.
(4)
In that case, so far as—
(a)
the company has not obtained relief in respect of the trading loss under
any other provision, and
(b)
the loss has not been surrendered under section 403(1) of ICTA
30
(surrender of relief to group or consortium members),

the trading loss is to be treated as if it were a loss of that trade brought forward
under section 393 of ICTA (relief of trading losses against future trading
profits).
(5)
Subsection (4) is subject to section 1062 (restriction on losses carried forward
35
where tax credit claimed).
1049
Restriction on consortium relief
(1)
This section applies if—
(a)
a company claims relief under section 1044 or elects to obtain relief
under section 1045 in respect of an accounting period,
40
(b)
at any time during the period the company is owned by a consortium,
and

Corporation Tax Bill
Part 13 — Additional relief for expenditure on research and development
Chapter 2 — Relief for SMEs: cost of R&D incurred by SME
495

(c)
at least one of the members of the consortium is a large company.
(2)
The amount of the relief obtained in respect of the accounting period may not
be surrendered by the company to another company, for the purposes of a
consortium group relief claim, unless the other company is a small or medium-
sized enterprise.
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(3)
A “consortium group relief claim” means a claim to group relief under section
402(3) of ICTA (group relief available between members of consortia).
Threshold
1050
R&D threshold
(1)
For the purposes of this Chapter a company meets the R&D threshold in an
10
accounting period if its total qualifying R&D expenditure for the period is at
least—
(a)
£10,000, if the accounting period is a period of 12 months, or
(b)
the amount given by subsection (2), if the accounting period is a period
of less than 12 months.
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(2)
The amount referred to in subsection (1)(b) is— $equation: cross[over[char[X],num[365.0000000000000000,"365"]],string["\xa3 10,000"]]$

where X is the number of days in the accounting period.
(3)
A company’s “total qualifying R&D expenditure” for an accounting period is
the sum of—
(a)
its qualifying Chapter 2 expenditure (see section 1051),
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(b)
its qualifying Chapter 3 expenditure (see section 1065), and
(c)
its qualifying Chapter 4 expenditure (see section 1070),

that is deductible in the period.
(4)
Subsections (5) to (7) apply for the purpose of determining whether
expenditure is deductible in an accounting period.
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(5)
A company’s qualifying Chapter 2 expenditure is deductible in an accounting
period if—
(a)
it is allowable as a deduction in calculating for corporation tax
purposes the profits for the period of a trade carried on by the
company, or
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(b)
it would have been allowable as such a deduction had the company, at
the time the expenditure was incurred, been carrying on a trade
consisting of the activities in respect of which it was incurred.
(6)
For the purposes of subsection (5)(a), section 61 (pre-trading expenses treated
as incurred when trading begins) is to be ignored.
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(7)
Each of the following—
(a)
a company’s qualifying Chapter 3 expenditure, and
(b)
a company’s qualifying Chapter 4 expenditure,

is deductible in an accounting period if it is allowable as a deduction in
calculating for corporation tax purposes the profits for the period of a trade
40
carried on by the company.

Corporation Tax Bill
Part 13 — Additional relief for expenditure on research and development
Chapter 2 — Relief for SMEs: cost of R&D incurred by SME
496

(8)
Expenditure allowable as a deduction for the purposes of subsection (7)
includes expenditure so allowable because of section 61 (pre-trading
expenses).
Qualifying expenditure
1051
Qualifying Chapter 2 expenditure
5
For the purposes of this Part a company’s “qualifying Chapter 2 expenditure”
means—
(a)
its qualifying expenditure on in-house direct research and
development (see section 1052), and
(b)
its qualifying expenditure on contracted out research and development
10
(see section 1053).
1052
Qualifying expenditure on in-house direct R&D
(1)
A company’s “qualifying expenditure on in-house direct research and
development” means expenditure incurred by it in relation to which each of
conditions A to E is met.
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(2)
Condition A is that the expenditure is—
(a)
incurred on staffing costs (see section 1123),
(b)
incurred on software or consumable items (see section 1125),
(c)
qualifying expenditure on externally provided workers (see section
1127), or
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(d)
incurred on relevant payments to the subjects of a clinical trial (see
section 1140).
(3)
Condition B is that the expenditure is attributable to relevant research and
development undertaken by the company itself.
(4)
Condition C is that any intellectual property created as a result of the research
25
and development to which the expenditure is attributable is, or will be, vested
in the company (whether alone or with other persons).
(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)
Condition E is that the expenditure is not subsidised (see section 1138).
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(7)
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.
1053
Qualifying expenditure on contracted out R&D
(1)
A company’s “qualifying expenditure on contracted out research and
35
development” means expenditure—
(a)
which 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 D is met.
(2)
Condition A is that the expenditure is attributable to relevant research and
40
development undertaken on behalf of the company.

Corporation Tax Bill
Part 13 — Additional relief for expenditure on research and development
Chapter 2 — Relief for SMEs: cost of R&D incurred by SME
497

(3)
Condition B is that any intellectual property created as a result of the research
and development to which the expenditure is attributable is, or will be, vested
in the company (whether alone or with other persons).
(4)
Condition C is that the expenditure is not incurred by the company in carrying
on activities which are contracted out to the company by any person.
5
(5)
Condition D is that the expenditure is not subsidised (see section 1138).
(6)
See sections 1124, 1126 and 1132 for provision about when particular kinds of
expenditure are attributable to relevant research and development.
Tax credit: entitlement and payment
1054
Entitlement to and payment of tax credit
10
(1)
A company is entitled to an R&D tax credit for an accounting period if it has a
Chapter 2 surrenderable loss in the period (see section 1055).
(2)
For the company to obtain an R&D tax credit in respect of all or part of the
Chapter 2 surrenderable loss it must make a claim.

See section 1057 (which prevents a company from making a claim if it is not a
15
going concern).
(3)
The amount of an R&D tax credit to which the company is entitled is
determined in accordance with section 1058.
(4)
If a company makes a claim for an R&D tax credit to which it is entitled for an
accounting period, an officer of Revenue and Customs must pay to the
20
company the amount of the credit.

This is subject to section 1060.
(5)
This section is subject to section 1113 (cap on R&D aid in relation to a particular
research and development project).
(6)
See also section 1062, which restricts the carry forward of losses where a
25
company claims an R&D tax credit.
1055
Meaning of “Chapter 2 surrenderable loss”
(1)
For the purposes of this Chapter a company has a “Chapter 2 surrenderable
loss” if in an accounting period—
(a)
it obtains an additional deduction under section 1044 in calculating the
30
profits of a trade and it makes a trading loss in that period in the trade,
or
(b)
it is treated as making a trading loss under section 1045.
(2)
If relief is obtained under section 1044 the amount of the Chapter 2
surrenderable loss is—
35
(a)
so much of the trading loss as is unrelieved, or
(b)
if less, 175% of the qualifying Chapter 2 expenditure in respect of which
the relief was obtained.
(3)
If relief is obtained under section 1045 the amount of the Chapter 2
surrenderable loss is so much of the trading loss as is unrelieved.
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