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Clause 1068: Additional deduction in calculating profits of trade
2781. This clause allows a small or medium-sized enterprise to claim relief for expenditure on research and development that is subsidised. It is based on paragraph 11 of Schedule 12 to FA 2002.
2782. As with relief under Chapters 2 and 3, relief under Chapter 4 is given as an additional deduction for expenditure that is already deductible in calculating trade profits (see subsections (4) and (7)). The amount of the deduction is increased by 30% (see subsection (8)).
2783. This clause makes clear that relief is given only to companies liable to corporation tax. See Change 77 in Annex 1 and the commentary on clause 1039 (overview of Part).
Clause 1069: R&D threshold
2784. This clause gives the minimum amount of qualifying expenditure the company must incur in an accounting period to claim relief under this Chapter. It is based on paragraph 10A of Schedule 12 to FA 2002.
Clause 1070: Qualifying Chapter 4 expenditure
2785. This clause identifies the two categories of expenditure that qualify for relief under this Chapter. It is based on paragraph 10B of Schedule 12 to FA 2002.
2786. This Bill takes a different approach to identifying the qualifying conditions from that taken in the source legislation. Paragraph 10B of Schedule 12 to FA 2002 defines what it calls “qualifying additional SME expenditure” by providing first that the expenditure would qualify for relief under Part 1 of Schedule 12 to FA 2002. It then superimposes the qualifying conditions in Schedule 20 to FA 2000. But it removes the condition that the expenditure must not be subsidised.
2787. In this Chapter the qualifying conditions are set out in full to avoid the reader having to make these modifications.
Clause 1071: Subsidised qualifying expenditure on in-house direct R&D
2788. This clause defines what is meant by “subsidised qualifying expenditure on in-house direct research and development”. It is based on paragraph 10B of Schedule 12 to FA 2002.
2789. The clause does not rewrite the condition in paragraph 10B(c) of Schedule 12 to FA 2002 that the expenditure “is not qualifying sub-contracted R&D expenditure for the purposes of this Schedule”. It is unnecessary.
2790. To qualify under Part 2A of Schedule 12 to FA 2002 the expenditure must qualify for relief under Schedule 20 to FA 2000 but for the fact it is subsidised. Expenditure would not qualify under Schedule 20 to FA 2000 if it were paid in respect of activities sub-contracted to the company. Condition E in subsection (6), which reproduces condition D in clause 1052, is all that is required.
2791. This clause does not reproduce the condition that the expenditure must not be capital in nature. This condition is unnecessary because clause 53 in Part 3, the trading income Part, already prohibits a deduction for capital expenditure.
Clause 1072: Subsidised qualifying expenditure on contracted out R&D
2792. This clause defines what is meant by “subsidised qualifying expenditure on contracted out research and development”. It is based on paragraph 10B of Schedule 12 to FA 2002.
2793. The clause does not allow a small or medium-sized enterprise to claim relief for a subsidised contribution to independent research and development. A large company can claim relief for such expenditure (see clause 1079). But a small or medium-sized enterprise cannot and therefore the condition in paragraph 10B(b) of Schedule 12 to FA 2002 would not be satisfied.
2794. This clause does not reproduce the condition that the expenditure must not be capital in nature. This condition is unnecessary because clause 53 in Part 3 (trading income) already prohibits a deduction for capital expenditure.
Clause 1073: Capped R&D expenditure
2795. This clause defines what is meant by “capped R&D expenditure”. It is based on paragraph 10C of Schedule 12 to FA 2002.
Chapter 5: Relief for large companies
Overview
2796. This Chapter gives relief for expenditure on direct research and development undertaken by a large company itself and for research and development that is contracted out to it. It is based on Part 1 of Schedule 12 to FA 2002.
2797. The Chapter applies only to expenditure incurred on or after 1 April 2002. See paragraph 20(1) of Schedule 12 to FA 2002. Schedule 2 (transitionals and savings) preserves this commencement rule (which, for the purposes of this Bill, is relevant only to pre-trading expenditure).
2798. A “large company” is any company which is not a small or medium-sized enterprise (see clause 1122).
Clause 1074: Additional deduction in calculating profits of trade
2799. This clause allows a large company to claim an additional deduction for qualifying expenditure on research and development. It is based on paragraph 11 of Schedule 12 to FA 2002.
2800. As with the reliefs given to small or medium-sized enterprises, relief under Chapter 5 is given as an additional deduction for expenditure that is already deductible in calculating trade profits (see subsection (6)). The amount of the deduction is increased by 30% (see subsection (7)).
2801. This clause makes clear that relief is given only to companies liable to corporation tax. See Change 77 in Annex 1 and the commentary on clause 1039 (overview of Part).
Clause 1075: R&D threshold
2802. This clause gives the minimum amount of expenditure that a company must incur in an accounting period to claim relief under this Chapter. It is based on paragraph 1 of Schedule 12 to FA 2002.
2803. The minimum amount of expenditure is £10,000, reduced proportionately if the accounting period is less than 12 months long. As in clause 1050, the source legislation does not explicitly state how the reduction is done. Subsection (2) removes any uncertainty by prescribing the arithmetic formula to be used. See Change 78 in Annex 1.
2804. The normal operation of clause 61 is not suspended. So pre-trading expenditure that is bunched into the accounting period in which the trade starts counts towards the threshold (see subsection (4)).
Clause 1076: Qualifying Chapter 5 expenditure
2805. This clause identifies the three categories of expenditure that qualify for relief under this Chapter. It is based on paragraph 3 of Schedule 12 to FA 2002.
Clause 1077: Qualifying expenditure on in-house direct R&D
2806. This clause defines “qualifying expenditure on in-house direct research and development”. It is based on paragraph 4 of Schedule 12 to FA 2002.
2807. “In-house direct research and development” is the term this Bill uses to describe research and development that is undertaken directly by the company.
2808. The clause does not reproduce the condition in paragraph 4(5) of Schedule 12 to FA 2002 that the expenditure is not of a capital nature. This is not necessary as clause 53 in Part 3 (trading income) already prohibits a deduction for capital expenditure.
2809. Condition C in subsection (4) identifies the expenditure that qualifies if the research and development is contracted out to the company. It prevents more than one company claiming the relief and the benefit of the relief leaking into the income tax sector.
2810. If a large company commissions the research and development the company will not be able to claim relief under this Chapter. This is because that Chapter requires the company to carry out the research and development itself. So subsection (4) allows a large company to which the research and development is sub-contracted to claim the relief.
2811. If the research and development is contracted out by a small or medium-sized enterprise that company will be able to claim relief itself under Chapter 2 of this Part. The effect of subsection (4) is to prevent relief also being given to the sub-contractor large company.
2812. The relief given by this Part is restricted to corporation tax payers. Subsection (4) prevents a sub-contractor company getting relief if the work has been contracted out by a person, other than a large company, who could get a deduction for the payment in calculating its trade profits. This prevents the sub-contractor passing on some of the benefit of the relief to an income tax payer by charging lower prices.
Clause 1078: Qualifying expenditure on contracted out R&D
2813. This clause defines “qualifying expenditure on contracted out research and development”. It is based on paragraph 5 of Schedule 12 to FA 2002.
2814. The clause does not reproduce the condition in paragraph 5(5) of Schedule 12 to FA 2002 that the expenditure is not of a capital nature. This is not necessary as clause 53 in Part 3 (trading income) already prohibits a deduction for capital expenditure.
Clause 1079: Qualifying expenditure on contributions to independent R&D
2815. This clause defines “qualifying expenditure on contributions to independent research and development”. It is based on paragraph 6 of Schedule 12 to FA 2002.
2816. The main purpose of this clause is to support research and development carried out by universities and other non-taxpaying research institutions.
Clause 1080: Entitlement to relief: I minus E basis
2817. This clause describes the way a claim for R&D relief is given effect in the case of a company carrying on life assurance business. It is based on paragraph 13 of Schedule 12 to FA 2002.
Chapter 6: Chapters 2 to 5: further provision
Clause 1081: Insurance companies treated as large companies
2818. This clause provides that a company which carries on life assurance business in an accounting period and which qualifies as a small or medium-sized enterprise (see clause 1119) is to be treated as a large company (see clause 1122) for the purposes of Chapters 2 to 5. It is based on paragraph 12 of Schedule 12 to FA 2002.
Clause 1082: R&D expenditure of group companies
2819. This clause deals with the case where the research and development in a group of companies is undertaken by particular members of the group on behalf of other group companies. It is based on paragraph 14 of Schedule 12 to FA 2002.
2820. Subsection (3) extends the scope of the provisions to cover work contracted out to third parties.
Clause 1083: Refunds of expenditure treated as income chargeable to tax
2821. This clause applies the charge to tax under Chapter 2 of Part 3 if the company gets a refund of expenditure for which it has received certain of the reliefs given by this Part. It is based on paragraph 15 of Schedule 12 to FA 2002.
Clause 1084: Artificially inflated claims for relief or tax credit
2822. This clause denies relief for transactions that are intended to increase artificially the amount of relief or R&D tax credit. It is based on paragraph 21 of Schedule 20 to FA 2000 and paragraph 16 of Schedule 12 to FA 2002.
Chapter 7: Relief for SMEs and large companies: vaccine research etc
Overview
2823. This Chapter provides relief for research into certain vaccines and medicines. It is based on Schedule 13 to FA 2002.
2824. The Chapter applies only to expenditure incurred on or after 22 April 2003. See paragraph 28(1) of Schedule 13 to FA 2002. Schedule 2 (transitionals and savings) preserves this commencement rule (which, for the purposes of this Bill, is relevant only to pre-trading expenditure).
Clause 1085: Overview of Chapter
2825. This clause describes the contents of the Chapter. It is new.
Clause 1086: Meaning of “qualifying R&D activity”
2826. This clause defines “qualifying R&D activity” for the purposes of the relief available for vaccine research. It is based on paragraph 4 of Schedule 13 to FA 2002.
2827. The relief is intended to encourage research into vaccines that protect against diseases that are particularly prevalent in the developing world. This is reflected in the scope of subsections (1) and (2). A clade is a type of genetic grouping. Subsection (2) limits relief to research into the varieties of HIV that are most common in the developing world.
Clause 1087: Deduction in calculating profits of trade
2828. This clause allows the company to claim relief as a trade deduction for qualifying expenditure on vaccine research. It is based on paragraphs 14 and 21 of Schedule 13 to FA 2002.
2829. The clause combines the qualifying conditions that apply to small or medium-sized enterprises in paragraph 14 and to large companies in paragraph 21 of Schedule 13 to FA 2002. The amount of the relief is then given separately for each type of company in the following clauses. Also, clause 1092 allows a small or medium-sized enterprise to elect to create a trade loss in respect of pre-trading expenditure.
2830. This clause makes clear that relief is given only to companies liable to corporation tax. See Change 77 in Annex 1 and the commentary on clause 1039 (overview of Part).
Clause 1088: Large companies: declaration about effect of relief
2831. This clause requires that a claim for relief under clause 1087 be accompanied by a declaration. It is based on paragraph 21 of Schedule 13 to FA 2002.
Clause 1089: SMEs: amount of deduction
2832. This clause gives the amount of the deduction if a small or medium-sized enterprise claims relief as a trade deduction. It is based on paragraph 14 of Schedule 13 to FA 2002.
2833. The normal operation of clause 61 in Part 3 is suspended when allocating qualifying expenditure to an accounting period (see clause 1099(2)). Pre-trading expenditure is allocated to periods of account in accordance with generally accepted accounting practice and is not treated as incurred when the company starts to trade.
2834. The company may be carrying on one trade and incur pre-trading expenditure in respect of another activity. Subsections (5) and (6) make clear that relief can be claimed on the pre-trading activity and given as a deduction in calculating the profits of the existing trade. This follows from paragraph 14(1)(b) of Schedule 13 to FA 2002, which requires only that the company be carrying on a trade. There is no requirement that the relief is given in calculating the profits of the trade for which the relief is given.
Clause 1090: Modification of section 1089 for larger SMEs
2835. This clause modifies clause 1089. It is based on paragraphs 13, 14 and 15A of Schedule 13.
2836. The purpose of this modification is to keep the deduction in clause 1089 within the European Union limit on state aid. “Larger SME” is defined in clause 1121. Schedule 2 (transitionals and savings) disapplies the “larger SME” category of company in relation to expenditure incurred before 1 August 2008. This preserves the commencement rule in section 50(7) of FA 2007.
Clause 1091: Large companies: amount of deduction
2837. This clause gives the amount of the deduction if a large company claims relief as a trade deduction. It is based on paragraph 21 of Schedule 13 to FA 2002.
Clause 1092: SMEs: deemed trading loss for pre-trading expenditure
2838. This clause allows a small or medium-sized enterprise to claim immediate relief for qualifying expenditure incurred in a pre-trading period. It is based on paragraph 15 of Schedule 13 to FA 2002.
2839. The clause is very similar to clause 1045. A small or medium-sized enterprise can elect to create a trading loss in respect of pre-trading expenditure that qualifies for relief under this Chapter.
2840. Clause 1099(1)(b) has an important role to play in the operation of this clause. It determines how pre-trading expenditure is allocated to accounting periods. This determines whether the threshold test in subsection (3) is met and the amount on which relief is given.
2841. This clause makes clear that relief is given only to companies liable to corporation tax. See Change 77 in Annex 1 and the commentary on clause 1039 (overview of Part).
Clause 1093: Modification of section 1092 for larger SMEs
2842. This clause modifies clause 1092. It is based on paragraphs 13, 14 and 15A of Schedule 13. The purpose of this modification is to keep the deduction in clause 1092 within the European Union limit on state aid. “Larger SME” is defined in clause 1121.
Clause 1094: Relief only available to SME where company is going concern
2843. This clause sets out a precondition for relief under clauses 1087 and 1092. It is based on paragraph 18A of Schedule 13 to FA 2002.
Clause 1095: Elections under section 1092
2844. This clause gives the procedure for making an election under clause 1092. It is based on paragraph 15 of Schedule 13 to FA 2002.
Clause 1096: Treatment of deemed trading loss under section 1092
2845. This clause imposes a restriction on the use of the trade loss and explains how any unused loss is to be dealt with. It is based on paragraph 15 of Schedule 13 to FA 2002.
2846. The clause is identical in effect to clause 1048.
Clause 1097: R&D threshold
2847. This clause gives the minimum amount of expenditure that a company must incur in an accounting period to claim relief under this Chapter. It is based on paragraph 1 of Schedule 13 to FA 2002.
2848. The minimum amount of expenditure is £10,000, reduced proportionately if the accounting period is less than 12 months long. As in clause 1050, the source legislation does not explicitly state how the reduction is done. Subsection (2) removes any uncertainty by prescribing the arithmetic formula to be used. See Change 78 in Annex 1.
Clause 1098: Meaning of “qualifying Chapter 7 expenditure”
2849. This clause identifies the three categories of expenditure which qualify for relief. It is based on paragraph 2 of Schedule 13 to FA 2002.
Clause 1099: SMEs: qualifying expenditure “for” an accounting period
2850. This clause explains how qualifying expenditure is allocated to the accounting periods of a small or medium-sized enterprise. It is based on paragraph 2 of Schedule 13 to FA 2002.
2851. Subsection (2) suspends the normal operation of clause 61 in Part 3 for pre-trading expenditure. Pre-trading expenditure is not treated as incurred on the first day of trading. Instead subsection (1)(b) treats the expenditure as incurred for an accounting period if it would have been deductible in calculating the trade profits for that period if the company had been trading.
2852. Relief is available for pre-trading expenditure not just under clause 1092 but also under the main rule in clause 1089 if it can be deducted in calculating the profits of a trade.
Clause 1100: Large companies: qualifying expenditure “for” an accounting period
2853. This clause explains how qualifying expenditure is allocated to the accounting periods of a large company. It is based on paragraph 2 of Schedule 13 to FA 2002.
2854. Subsection (1) deals with in-house direct research and development and contracted out research and development. Expenditure is incurred for an accounting period if it is deductible in calculating the trade profits for that period. Unlike small or medium-sized enterprises the normal rules for pre-trading expenditure in clause 61 in Part 3 apply (see subsection (2)). Any pre-trading expenditure will be treated as incurred the day the company starts trading.
Clause 1101: Qualifying expenditure on in-house direct R&D
2855. This clause defines “qualifying expenditure on in-house direct research and development”. It is based on paragraph 3 of Schedule 13 to FA 2002.
2856. “In-house direct research and development” is the term this Bill uses to describe research and development that is undertaken directly by the company.
2857. Subsections (2) and (3) rewrite sub-paragraphs (2) and (3) of paragraph 3 of Schedule 13 to FA 2002 which refer to the expenditure being on qualifying R&D activity. This clause refers to the expenditure being attributable to qualifying R&D activity in order to align the language with that in Chapters 2 to 5 of this Part.
2858. Paragraph 3(3) of Schedule 20 to FA 2000 and paragraphs 4(4) and 9(3) of Schedule 12 to FA 2002 all require that the qualifying expenditure is attributable to relevant research and development. The provisions that define particular classes of expenditure have rules for determining if the expenditure is attributable to relevant research and development.
2859. Paragraph 3(3) of Schedule 13 to FA 2002 requires that the “qualifying R&D activity on which the expenditure is incurred is relevant research and development in relation to the company”. This test is the same as requiring the expenditure to be attributable to relevant research and development and the clause adopts the language of the earlier Chapters.
2860. The clause does not reproduce the condition in paragraph 3(4) of Schedule 13 to FA 2002 that the expenditure is not of a capital nature. This is not necessary as clause 53 in Part 3 (trading income) already prohibits a deduction for capital expenditure.
Clause 1102: Qualifying expenditure on contracted out R&D
2861. This clause defines “qualifying expenditure on contracted out research and development”. It is based on paragraphs 6 and 7 of Schedule 13 to FA 2002.
2862. The clause covers payments to a sub-contractor. The conditions in the clause have to be satisfied but it also necessary to isolate the sub-contractor element of the payment. This is described in clauses 1134 to 1136.
2863. Subsections (3) and (4) also refer to the expenditure being attributable to qualifying R&D activity. See the commentary on clause 1101.
2864. The clause does not reproduce the condition in paragraph 7(5) of Schedule 13 to FA 2002 that the expenditure is not of a capital nature. This is not necessary as clause 53 in Part 3 (trading income) already prohibits a deduction for capital expenditure.
Clause 1103: Entitlement to and payment of tax credit
2865. This clause allows a small or medium-sized enterprise to claim an R&D tax credit. It is based on paragraphs 16 and 18 of Schedule 13 to FA 2002.
2866. The clause clarifies that a company may make part claims (subsection (2)).
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