Clause 1104: Meaning of “Chapter 7 surrenderable loss”

2867.     This clause defines “Chapter 7 surrenderable loss”. It is based on paragraph 16 of Schedule 13 to FA 2002.

2868.     The clause follows the same pattern as clause 1055 (meaning of “Chapter 2 surrenderable loss”) but the restriction in subsection (2) if the claim is made by a trading company is slightly different.

2869.     Clause 1055(2)(b) gives relief both for the additional deduction and for the underlying expenditure. Subsection (2) denies relief for the underlying expenditure. This is because if the company has had relief under Chapter 2 it will already have had relief for the underlying expenditure in making an R&D tax credit claim under clause 1055.

Clause 1105: Amount of trading loss which is “unrelieved”

2870.     This clause lists the other ways in which a company may get relief for the loss. It is based on paragraph 16 of Schedule 13.

Clause 1106: Tax credit only available where company is going concern

2871.     This clause sets out a precondition for relief under clause 1103. It is based on paragraph 18A of Schedule 13 to FA 2002.

Clause 1107: Amount of tax credit

2872.     This clause gives the amount of the R&D tax credit. It is based on paragraph 17 of Schedule 13 to FA 2002.

Clause 1108: Total amount of company’s PAYE and NIC liabilities

2873.     This clause explains how to calculate the total amount of a company’s PAYE and NIC liabilities. It is based on paragraph 17 of Schedule 13 to FA 2002.

Clause 1109: Payment of tax credit

2874.     This clause explains the circumstances in which the payment of an R&D tax credit can be withheld or set against arrears of corporation tax. It is based on paragraph 18 of Schedule 13 to FA 2002.

Clause 1110: Tax credit payment not income of company

2875.     This clause makes clear that a payment of an R&D tax credit is not income of the company for tax purposes. It is based on paragraph 20 of Schedule 13 to FA 2002.

Clause 1111: Restriction on losses carried forward where tax credit claimed

2876.     This clause provides that any losses that are surrendered in return for an R&D tax credit are not available for carry forward. It is based on paragraph 19 of Schedule 13 to FA 2002.

Clause 1112: Artificially inflated claims for relief or tax credit

2877.     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 24 of Schedule 13 to FA 2002.

Chapter 8: Cap on aid for R&D

Overview

2878.     This Chapter sets out the rules for calculating the cap on R&D aid for the purposes of Chapters 2 and 7. It sets out the formula for the calculation of the cap, and brings together the definitions of terms that constitute that formula.

2879.     Schedule 2 (transitionals and savings) preserves the transitional provision in paragraph 7 of Schedule 10 to FA 2008. This provides that no account is to be taken, for the purpose of calculating “total R&D aid” in accordance with clause 1089, of any relief or tax credit under Chapter 2 or 7 of Part 13 in respect of expenditure incurred before 1 August 2008.

Clause 1113: Cap on R&D aid under Chapter 2 or 7

2880.     This clause imposes a cap on the total amount of R&D aid which may be claimed in respect of a project. It is based on section 29 of, and paragraph 6 of Schedule 10 to, FA 2008.

Clause 1114: Total R&D aid

2881.     This clause sets out the rules for calculating the cap on R&D aid for a project. It is based on paragraph 1 of Schedule 10 to FA 2008.

Clause 1115: “The tax credits”

2882.     This clause defines “the tax credits” for the purposes of the formula prescribed in clause 1114. It is based on paragraph 2 of Schedule 10 to FA 2008.

Clause 1116: “The actual reduction in tax liability”

2883.     This clause defines “the actual reduction in tax liability” for the purposes of the formula prescribed in clause 1114. It is based on paragraph 3 of Schedule 10 to FA 2008.

Clause 1117: “The potential relief”

2884.     This clause defines “the potential relief” for the purposes of the formula prescribed in clause 1114. It is based on paragraph 4 of Schedule 10 to FA 2008.

Clause 1118: “The notional relief”

2885.     This clause defines “the notional relief” for the purposes of the formula prescribed in clause 1114. It is based on paragraph 5 of Schedule 10 to FA 2008.

Chapter 9: Supplementary

Overview

2886.     This Chapter brings together the definitions of terms that apply to each of the earlier Chapters. Most of these definitions are given in Schedule 20 to FA 2000 but they are applied to Schedules 12 and 13 to FA 2002 by the respective paragraphs 17 and 5 of those Schedules. In such cases the commentary refers only to the Schedule 20 provision on which the definition is based.

Clause 1119: “Small or medium-sized enterprise”

2887.     This clause defines “small or medium-sized enterprise”. It is based on paragraph 2 of Schedule 20 to FA 2000, paragraph 2 of Schedule 12 and paragraph 5 of Schedule 13 to FA 2002.

Clause 1120: Qualifications to section 1119

2888.     This clause makes two qualifications to the European Union definition of small or medium-sized enterprise. It is based on paragraph 2 of Schedule 20 to FA 2000, paragraph 2 of Schedule 12 to FA 2002 and 5 of Schedule 13 to FA 2002.

2889.     The European Union definition is in the Annex to Commission Recommendation 2003/361/EC of 6 May 2003, as incorporated by reference in clause 1119(1). Article 3 of the Annex requires a company to include figures from a partner or linked enterprise in determining whether it breaches the qualifying thresholds (aggregation). This is called “aggregation”.

2890.     Article 4(2) of the Annex gives the company a period of grace if the inclusion of those figures means it ceases to be a small or medium-sized enterprise. The company will cease to be a small or medium-sized enterprise within the European Union definition only if the limits are exceeded in two consecutive accounting periods.

2891.     The purpose of Qualification 2 in this clause is to remove that period of grace for the purposes of this Part, so that the company ceases to be a small or medium-sized enterprise in the second accounting period. The effect of Qualification 2 in this clause is to disapply Article 4(2) of the Annex so that Article 2 of the Annex applies instead. Article 2 of the Annex provides: “In respect of any year, you must use the year end accounts for that year to classify the company, according to these criteria.”

Clause 1121: “Larger SME”

2892.     This clause defines “larger SME”. It provides a convenient label for companies falling within Qualification 1 of clause 1120. It is based on paragraphs 15A and 16A of Schedule 13 to FA 2002.

Clause 1122: “Large company”

2893.     This clause defines “large company”. It is based on paragraph 2 of Schedule 12 to FA 2002.

Clause 1123: “Staffing costs”

2894.     This clause defines “staffing costs”. It is based on paragraph 5 of Schedule 20 to FA 2000.

2895.     Paragraph 5(1)(a) of Schedule 20 to FA 2000 refers to “emoluments paid by the company .. including all salaries, wages, perquisites and profits whatsoever other than benefits in kind”. This is based on the definition of emoluments that section 131 of ICTA applied for Schedule E before that Schedule was rewritten by ITEPA.

2896.     None of the definitions of “earnings” in ITEPA is appropriate, because none matches the scope of the definition in paragraph 5(1)(a) of Schedule 20 to FA 2000.

2897.     In rewriting Schedule 20 to FA 2000 the language has been modernised and the definition has been adapted so that it applies more clearly from the position of the company making the payment, rather than the employee receiving it. This is achieved by referring to money earnings and reimbursed expenses. When interpreting these definitions, it should be borne in mind that this Part does not create a new class of deduction. It merely enhances an existing staffing costs deduction, the scope of which is determined on ordinary principles. Before an expense can be considered for the purposes of this Part, it must first be deductible on ordinary principles. See for example clause 1050(5).

2898.     Subsection (2) rewrites the reference to salaries and wages by reference to money earnings. “Earnings” takes its ordinary meaning. The statutory definitions of “earnings” in ITEPA are not relevant to the scope of “earnings” in this subsection. See Change 79 in Annex 1.

2899.     Subsection (3) rewrites the reference to perquisites or profits whatsoever by reference to reimbursed expenses but making clear that it does not include benefits in kind. See Change 79 in Annex 1.

2900.     In subsections (2) and (3), the phrase “because of employment” is used instead of the ITEPA phrase “by reason of employment”. The effect is that interpretations developed in relation to ITEPA, which might not be appropriate to this clause, cannot simply be read across into this clause.

2901.     ITEPA amended paragraph 5 of Schedule 20 to FA 2000 so that it referred to earnings which constitute employment income. In doing so it inadvertently expanded the definition to include benefits in kind. This change was reversed by paragraph 7 of Schedule 17 to FA 2004, which reinstated the original wording. Schedule 2 (transitionals and savings) preserves the wider definition inserted by ITEPA for the brief window in which it applies to accounting periods covered by this Bill. It is relevant only to expenditure incurred before 1 April 2004.

Clause 1124: Staffing costs: attributable expenditure

2902.     This clause identifies when staffing costs are attributable to relevant research and development. It is based on paragraph 5 of Schedule 20 to FA 2000.

2903.     In subsection (4) and in clauses 1126(4) and 1132(4) the phrase “appropriate proportion” is used, while in clauses 1129(7), 1134(6) and 1138(4) the concept of a just and reasonable apportionment is used. The two phrases have different meanings and are used in different circumstances. “Appropriate proportion” is used where the quantities or qualities to be determined are objectively measurable. “Just and reasonable” is used where the quantities to be determined are not objectively measurable and the apportionment exercise requires a measure of subjectivity.

2904.     When the legislation was introduced the test was that 80% of the director or employee’s working time had to be spent on relevant research and development. Schedule 2 (transitionals and savings) preserves this for pre-trading expenditure treated as incurred in the accounting periods to which this Bill applies. It is relevant only to expenditure incurred before 9 April 2003 (Chapters 3 and 5) and 27 September 2003 (Chapters 2 and 7).

Clause 1125: “Software or consumable items”

2905.     This clause defines “software or consumable items”. It is based on paragraph 6 of Schedule 20 to FA 2000.

2906.     When the legislation was introduced relief under all the Chapters in this Part was given for expenditure on “consumable stores”. Schedule 2 (transitionals and savings) preserves this for pre-trading expenditure treated as incurred in the accounting periods to which this Bill applies. It is relevant only to expenditure incurred before 1 April 2004.

Clause 1126: Software or consumable items: attributable expenditure

2907.     This clause identifies when expenditure on software or consumable items is attributable to relevant research and development. It is based on paragraph 6 of Schedule 20 to FA 2000.

Clause 1127: “Qualifying expenditure on externally provided workers”

2908.     This clause defines “qualifying expenditure on externally provided workers”. It is based on paragraph 8A of Schedule 20 to FA 2000.

2909.     This clause is the first of six clauses that deal with the relief given in relation to expenditure on externally provided workers. Clauses 1129 to 1131 explain how to calculate this amount. These clauses focus on the subject matter of the expenditure. Clause 1132 then identifies whether that expenditure is incurred on relevant research and development.

2910.     The relief applies only to expenditure incurred on or after 9 April 2003 (Chapters 3 and 5) or 27 September 2003 (Chapters 2, 4 and 7). Schedule 2 (transitionals and savings) preserves this for pre-trading expenditure treated as incurred in the accounting periods to which this Bill applies.

Clause 1128: “Externally provided worker”

2911.     This clause defines “externally provided worker”. It is based on paragraph 8B of Schedule 20 to FA 2000.

Clause 1129: Qualifying expenditure on externally provided workers: connected persons

2912.     This clause gives the amount of the qualifying expenditure if the company and the staff provider are connected. It is based on paragraph 8C of Schedule 20 to FA 2000.

2913.     The definition of connected persons in section 839 of ICTA (applied by clause 1316(1)) applies.

2914.     Subsection (3) defines “relevant expenditure”. It provides for the exclusion for expenditure of a capital nature that is omitted in the rewrite of other provisions of the source legislation for this Part. Clause 53 in Part 3 (trading income), which denies a deduction for capital expenditure, applies to determine if the expenditure would be deductible in calculating the trading profits. It would not apply to exclude capital expenditure from the staff provider’s actual relevant expenditure.

2915.     The definition of “agency workers’ remuneration” in subsection (6) omits the reference to section 134 of ICTA in paragraph 8C(4)(b) of Schedule 20 to FA 2000. The ICTA provision was repealed by ITEPA and the cross-reference is no longer required.

Clause 1130: Election for connected persons treatment

2916.     This clause allows a company and a staff provider who are not connected to elect for connected persons treatment. It is based on paragraph 8D of Schedule 20 to FA 2000.

2917.     The word “other” in subsection (2) does not appear in paragraph 8D(2) of Schedule 20 to FA 2000 (the source for this subsection). It does appear in a similar context in paragraph 11(2) of Schedule 20 (the source for clause 1131(2)). The inclusion of the word in subsection (2) of this clause promotes consistency without changing the meaning of the law.

Clause 1131: Qualifying expenditure on externally provided workers: other cases

2918.     This clause identifies the amount of the qualifying expenditure if the company and staff provider are not connected and have not made an election under clause 1130. It is based on paragraph 8E of Schedule 20 to FA 2000.

Clause 1132: External workers: attributable expenditure

2919.     This clause identifies when qualifying expenditure on externally provided workers is attributable to relevant R&D. It is based on paragraph 8A of Schedule 20 to FA 2000.

2920.     The clause follows the pattern of clause 1124 which performs a similar function for staffing costs.

Clause 1133: “Sub-contractor” and “sub-contractor payment”

2921.     This clause defines “sub-contractor” and “sub-contractor payment”. It is based on paragraph 9 of Schedule 20 to FA 2000 and paragraph 6 of Schedule 13 to FA 2002.

2922.     This clause is the first of a group of clauses that apply to sub-contractor payments. The clauses are very similar to those that apply to qualifying expenditure on externally provided workers.

Clause 1134: Qualifying element of sub-contractor payment: connected persons

2923.     This clause identifies the qualifying element of a sub-contractor payment if the company and the sub-contractor are connected persons. It is based on paragraph 10 of Schedule 20 to FA 2000, paragraph 10B of Schedule 12 to FA 2002 and paragraph 8 of Schedule 13 to FA 2002.

2924.     The definition of connected persons in section 839 of ICTA (applied by clause 1316(1)) applies.

2925.     Subsection (3) defines “relevant expenditure”. It provides for the exclusion for expenditure of a capital nature that is omitted in the rewrite of other provisions of the source legislation for this Part. See the commentary on clause 1129(3) for an explanation of this.

Clause 1135: Election for connected persons treatment

2926.     This clause allows a company and a sub-contractor which are not connected to elect to be treated as if they were connected. It is based on paragraph 11 of Schedule 20 to FA 2000, paragraph 10B of Schedule 12 to FA 2002 and paragraph 10 of Schedule 13 to FA 2002.

2927.     Subsection (4) provides for a time limit in which the election must be made. This time limit does not apply in certain circumstances in the case of companies affected by the repeal of paragraph 6(3) of Schedule 13 to FA 2002 (100% relief where the subcontractor is a charity etc). Schedule 2 (transitionals and savings) provides that where the notice is given before 31 July 2009, the time limit does not apply.

Clause 1136: Qualifying element of sub-contractor payment: other cases

2928.     This clause identifies the qualifying element of a sub-contractor payment if the company and the sub-contractor are not connected persons. It is based on paragraph 12 of Schedule 20 to FA 2000, paragraph 10B of Schedule 12 to FA 2002 and paragraph 11 of Schedule 13 to FA 2002.

Clause 1137: Accounting periods: company not within charge to corporation tax

2929.     This clause treats a company as having an accounting period if it incurs qualifying Chapter 2 or 7 expenditure at a time when it is not within the charge to corporation tax. It is based on paragraph 25 of Schedule 20 to FA 2000 and paragraph 27 of Schedule 13 to FA 2002.

2930.     An accounting period is the basis for the determination of tax liability. If a company does not have an accounting period, or is not deemed to have one, then that company will not be able to perform the calculations which are necessary for it to take advantage of the provisions in clauses 1045 and 1092. Those clauses allow a company to elect to create a loss in respect of pre-trading expenditure. A company that is not yet trading may not have an accounting period. Clauses 1045 and 1092 operate by reference to accounting periods. This clause treats the company as having the accounting periods it would have had if it had been trading when it incurred the expenditure.

Clause 1138: “Subsidised expenditure”

2931.     This clause defines “subsidised expenditure”. It is based on paragraph 8 of Schedule 20 to FA 2000.

Clause 1139: “Intellectual property”

2932.     This clause defines “intellectual property”. It is based on paragraph 7 of Schedule 20 to FA 2000.

Clause 1140: “Relevant payments to the subjects of a clinical trial”

2933.     This clause defines “relevant payments to the subjects of a clinical trial”. It is based on paragraph 6A of Schedule 20 to FA 2000.

2934.     Schedule 2 (transitionals and savings) excludes the application of this Part in relation to this category of expenditure if the expenditure was incurred before 1 August 2008 (for the purposes of Chapters 2, 3 and 7) or 1 April 2006 (for the purposes of Chapters 4 and 5). This preserves the commencement set out in section 28 of FA 2006.

Clause 1141: “Payment period”

2935.     This clause defines “payment period”. It is based on paragraph 17 of Schedule 20 to FA 2000 and paragraph 27 of Schedule 13 to FA 2002.

Clause 1142: “Qualifying body”

2936.     This clause defines “qualifying body”. It is based on paragraph 18 of Schedule 12 to FA 2002.

Part 14: Remediation of contaminated land

Overview

2937.     This Part allows a company to claim relief for qualifying expenditure it incurs on the remediation of contaminated land. It is based on Schedule 22 to FA 2001.

2938.     Relief under the Part is given as a deduction in calculating the company’s trade profits or the profits of a UK property business carried on by the company.

Chapter 1: Introduction

Clause 1143: Overview of Part

2939.     This clause gives an overview of the Part. It is new.

Clause 1144: “Qualifying land remediation expenditure”

2940.     This clause sets out the conditions that expenditure on land remediation must satisfy to qualify for relief under this Part. It is based on paragraph 2 of Schedule 22 to FA 2001.

Clause 1145: Land “in a contaminated state”

2941.     This clause sets out when land is “in a contaminated state” for the purposes of this Part. It is based on paragraph 3 of Schedule 22 to FA 2001.

Clause 1146: “Relevant land remediation”

2942.     This clause identifies the activities that make up “relevant land remediation”. It is based on paragraph 4 of Schedule 22 to FA 2001.

2943.     “Relevant land remediation” can either be the remediation activity itself or activities in preparation for the remediation activity, see subsection (1). “Relevant preparatory activity” comes within the definition of “relevant land remediation” only if it leads to remediation activity being carried out, see subsection (4)(b).

Chapter 2: Reliefs for expenditure on contaminated land

Clause 1147: Deduction for capital expenditure

2944.     This clause gives the company a deduction for capital expenditure included in qualifying land remediation expenditure subject to certain conditions. It is based on paragraph 1 of Schedule 22 to FA 2001.

2945.     The company must elect to make the deduction. The procedure for making the election is in clause 1148.

2946.     Capital expenditure is not defined. It is expenditure for which a deduction would normally be denied by clause 53. But this clause permits a deduction for capital expenditure in calculating the profits of a trade or UK property business of a company in spite of the rule in clause 53.

2947.     The existence of clause 53 means it is not necessary to rewrite paragraph 1(4)(a) of Schedule 22 to FA 2001. That provision denies relief for expenditure that has already been allowed as a deduction in calculating the profits of a trade or of a UK property business carried on by the company. It is not needed if there is already a specific rule preventing a deduction for such expenditure.

2948.     Subsection (7) is a similar provision to clause 61. It treats capital expenditure incurred on contaminated land that will be used for the purposes of a trade or UK property business as incurred on the day the trade or business starts. Unlike clause 61 there is no time limit on how far in advance of the trade or business starting the expenditure must be incurred.