Finance Act 2002

Part 2 U.K. Manner of giving effect to relief: small and medium-sized companies

Application of this Part U.K.

13 This Part provides for how relief under this Schedule for an accounting period is to be given in the case of a company that qualifies as a small or medium-sized company in that period.

Deduction in computing profits of trade U.K.

14 (1) Where a company—

(a) is entitled to relief under this Schedule for an accounting period in respect of any qualifying expenditure, and

(b) is carrying on a trade in that period,

it may (on making a claim) make the appropriate deduction in computing the profits of the trade for that period.

[F1 (2) The appropriate deduction is 50% of the qualifying expenditure.]

(3) This paragraph is without prejudice to any other deduction in respect of the qualifying expenditure.

Textual Amendments

F1 Sch. 13 para. 14(2) substituted (with effect in accordance with s. 49(6) of the amending Act) by Finance Act 2007 (c. 11), s. 49(2)

Alternative treatment of pre-trading expenditure: deemed trading loss U.K.

15 (1) Where a company—

(a) is entitled to relief under this Schedule for an accounting period in respect of any qualifying expenditure, and

(b) is not carrying on a trade in that period,

it may elect to be treated as if it had incurred a trading loss in that accounting period.

(2) The amount of the trading loss is—

(a) 50% of so much of the qualifying expenditure as is expenditure in respect of which the company is also entitled to relief under Schedule 20 to the Finance Act 2000, and

(b) 150% of so much of the qualifying expenditure as is [F2 non-Schedule 20 expenditure.]

(3) Section 401 of the Taxes Act 1988 (relief for pre-trading expenditure) does not apply to qualifying expenditure in respect of which an election is made under this paragraph.

(4) An election under this paragraph must—

(a) specify the accounting period in respect of which it is made, and

(b) be made by notice in writing to the Inland Revenue given not later than two years after the end of the accounting period to which the election relates.

(5) Where a company is treated under this paragraph as incurring a trading loss in an accounting period, the trading loss may not be set off against profits of a preceding accounting period under section 393A(1)(b) of the Taxes Act 1988 unless the company in entitled to tax relief under this paragraph for that earlier period.

(6) Where a company is treated under this paragraph as incurring a trading loss in an accounting period and the company begins, in that accounting period or a later accounting period, to carry on a trade derived from the research and development in relation to which the tax relief in question was obtained under this paragraph, then—

(a) subject to paragraph 19 (restriction on losses carried forward), and

(b) to the extent that—

(i) the company has not obtained relief in respect of the trading loss under any other provision, and

(ii) the loss has not been surrendered under section 403(1) of the Taxes Act 1988 (surrender of relief to group or consortium members),

the loss shall be treated as if it were a loss of that trade brought forward under section 393 of that Act (relief of trading losses against future trading profits).

[F3 (7) Qualifying expenditure is “non-Schedule 20 expenditure” if the company is not entitled to relief under Schedule 20 to the Finance Act 2000 in respect of it.]

Textual Amendments

F2 Words in Sch. 13 para. 15(2)(b) substituted (with effect in accordance with s. 49(6) of the amending Act) by Finance Act 2007 (c. 11), s. 49(3)(a)

F3 Sch. 13 para. 15(7) inserted (with effect in accordance with s. 49(6) of the amending Act) by Finance Act 2007 (c. 11), s. 49(3)(b)

Paragraphs 14 and 15: modifications for larger SMEs claiming R&D tax credits U.K.

[F4 15A (1) This paragraph applies in relation to a company for an accounting period if—

(a) the company is a larger SME in the accounting period, and

(b) it claims a tax credit under paragraph 15 of Schedule 20 to the Finance Act 2000 (R&D tax credit) for the accounting period.

(2) The appropriate deduction under paragraph 14 above is 50% of so much of the qualifying expenditure as is non-Schedule 20 expenditure (as defined by paragraph 15(7)).

(3) Paragraph 15 above has effect as if sub-paragraph (2)(a) were omitted.

(4) In this paragraph “larger SME” means a company which qualifies as a small or medium-sized enterprise by virtue of Qualification A1 in paragraph 2(1) of Schedule 20 to the Finance Act 2000.]

Textual Amendments

F4 Sch. 13 para. 15A and cross-heading inserted (with effect in accordance with s. 50(7)-(9) of the amending Act) by Finance Act 2007 (c. 11), s. 50(5)

Entitlement to tax credit U.K.

16 (1) A company may claim a tax credit for an accounting period in which it has a surrenderable loss.

(2) A company has a “surrenderable loss” for an accounting period—

(a) if paragraph 14 applies and the company incurs a trading loss in that period in the trade mentioned in sub-paragraph (1)(b) of that paragraph;

(b) if paragraph 15 applies and the company is treated under that paragraph as incurring a trading loss.

[F5 (3) The amount of the surrenderable loss is equal to the lower of A and B where—

• A is so much of the trading loss referred to in sub-paragraph (2) as is unrelieved, and

• B is—

  (a)

  if paragraph 14 applies, the sum of the amount deductible under that paragraph and so much of the qualifying expenditure mentioned in that paragraph as is non-Schedule 20 expenditure;

  (b)

  if paragraph 15 applies, the total deemed trading loss under that paragraph.]

(4) For this purpose the amount of a trading loss that is “unrelieved” means the amount of that loss reduced by—

(a) any relief that was or could have been obtained by the company making a claim under section 393A(1)(a) of the Taxes Act 1988 to set the loss against profits of whatever description of the same accounting period,

(b) any other relief obtained by the company in respect of the loss, including relief under section 393A(1)(b) of that Act (losses set against profits of an earlier accounting period),

(c) any loss surrendered under section 403(1) of that Act (surrender of relief to group or consortium members), or

(d) any loss surrendered under paragraph 15 of Schedule 20 to the Finance Act 2000 (c. 17) (entitlement to R&D tax credit).

(5) No account shall be taken for this purpose of any losses—

(a) brought forward from an earlier accounting period under section 393(1) of the Taxes Act 1988, or

(b) carried back from a later accounting period under section 393A(1)(b) of that Act.

[F6 (6) Paragraph 15(7) (meaning of “non-Schedule 20 expenditure”) applies for the purposes of sub-paragraph (3).]

Textual Amendments

F5 Sch. 13 para. 16(3) substituted (with effect in accordance with s. 49(6) of the amending Act) by Finance Act 2007 (c. 11), s. 49(4)

F6 Sch. 13 para. 16(6) inserted (with effect in accordance with s. 49(6) of the amending Act) by Finance Act 2007 (c. 11), s. 49(5)

Entitlement to tax credit: modification for larger SMEs U.K.

[F7 16A (1) Paragraph 16(3) has effect in relation to a larger SME as if for the definition of “B” there were substituted—

“B is 150% of so much of the qualifying expenditure mentioned in paragraph 14 or 15 as is non-Schedule 20 expenditure.”

(2) “Larger SME” has the same meaning as in paragraph 15A.]

Textual Amendments

F7 Sch. 13 para. 16A and cross-heading inserted (with effect in accordance with s. 50(7)-(9) of the amending Act) by Finance Act 2007 (c. 11), s. 50(6)

Amount of credit U.K.

17 (1) The amount of the tax credit to which a company is entitled for an accounting period is 16% of the surrenderable loss for the period, subject to the following limit.

(2) The limit is that the total of the tax credits to which the company is entitled for an accounting period under this Schedule and under Schedule 20 to the Finance Act 2000 (c. 17) may not exceed the total of the company’s PAYE and NICs liabilities for payment periods ending in that accounting period.

(3) The Treasury may by order substitute for the percentage for the time being specified in sub-paragraph (1) such other percentage as they think fit.

(4) An order under sub-paragraph (3) may make such incidental, supplementary, consequential and transitional provision as the Treasury think fit.

(5) Paragraph 17 of Schedule 20 to the Finance Act 2000 (calculation of total amount of company’s PAYE and NICs liabilities for a payment period) applies for the purposes of this paragraph as it applies for the purposes of paragraph 16 of that Schedule.

Payment in respect of tax credit U.K.

18 (1) Where—

(a) a company is entitled to a tax credit under this Schedule for an accounting period, and

(b) makes a claim,

the Inland Revenue shall pay to the company the amount of the credit.

(2) An amount payable in respect of—

(a) a tax credit under this Schedule, or

(b) interest on a tax credit under this Schedule under section 826 of the Taxes Act 1988,

may be applied in discharging any liability of the company to pay corporation tax, and to the extent that it is so applied the Inland Revenue’s obligation under sub-paragraph (1) is discharged.

(3) Where the company’s company tax return for the accounting period is enquired into by the Inland Revenue, no payment in respect of a tax credit under this Schedule for that period need be made before the Inland Revenue’s enquiries are completed (see paragraph 32 of Schedule 18 to the Finance Act 1998 (c. 36)).

In those circumstances the Inland Revenue may make a payment on a provisional basis of such amount as they think fit.

(4) No payment need be made in respect of a tax credit under this Schedule for an accounting period before the company has paid to the Inland Revenue any amount that it is required to pay for payment periods ending in that accounting period—

(a) under the PAYE regulations, or

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

Restriction on losses carried forward U.K.

19 (1) For the purposes of section 393 of the Taxes Act 1988 (relief of trading losses against future trading profits), a company’s trading loss for a period for which it claims a tax credit under this Schedule is treated as reduced by the amount of the loss surrendered.

(2) The amount of the loss surrendered is—

(a) where the maximum amount of tax credit was claimed, the whole of the surrenderable loss for that period, and

(b) where less than the maximum amount was claimed, a corresponding proportion of the surrenderable loss for that period.

The “maximum amount” here means the amount specified in paragraph 17(1).

Payment in respect of tax credit not income U.K.

20 A payment in respect of a tax credit under this Schedule is not income of the company for tax purposes.