Part 13... expenditure on research and development
Chapter 2F1Relief for loss-making, R&D-intensive SMEs
Introductory
F21043Overview of Chapter
(1)
This Chapter provides relief for companies that are small or medium-sized enterprises, invest heavily in research and development, and do not make associated trading profits.
(2)
Section 1044 provides relief in the form of an additional deduction where the investment is made in the course of a loss-making trade.
(3)
Section 1045 provides relief in the form of a deemed trading loss where the investment is made the course of activities that do not yet amount to the carrying on of a trade.
(4)
Section 1045ZA specifies the intensity of spending on research and development needed for a company to qualify for relief under section 1044 or 1045.
(5)
Sections 1047 and 1048 make provision about the procedure for claiming, and the effect of, relief under section 1045.
(6)
Section 1049 restricts consortium relief where relief under section 1044 or 1045 is claimed.
(7)
Sections 1051 to 1053 describe the expenditure by reference to which the entitlement to relief under section 1044 or 1045 arises.
(8)
Sections 1054 to 1062 provide further relief in the form of a payable credit (called an “R&D tax credit”) in respect of trading losses increased or generated by relief under section 1044 or 1045.
(9)
Section 1062A excludes certain insurance companies.
(10)
This Chapter has to be read with Chapter 8, which limits the entitlements given by this Chapter in various respects.
Reliefs
1044Additional deduction in calculating profits of trade
(1)
A company is entitled to corporation tax relief for an accounting period if it meets each of conditions A to F3F.
(2)
Condition A is that the company is a small or medium-sized enterprise in the period.
F4(2A)
Condition B is that the company—
(a)
meets the R&D intensity condition in the period, or
(b)
obtained relief under this Chapter for its most recent prior accounting period of 12 months’ duration, having met the R&D intensity condition in that period.
F5(3)
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(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.
F6(5A)
Condition E is that the company makes a loss in the trade in the period.
(5B)
Condition F is that the company is not an ineligible company (see section 1142).
(6)
(7)
The relief is an additional deduction in calculating the profits of the trade for the period. F9The deduction is, in particular, additional to any given under section 87.
(8)
The amount of the additional deduction is F1086% of the qualifying Chapter 2 expenditure.
F11(9)
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(10)
For the meaning of “qualifying Chapter 2 expenditure” see section 1051.
1045Alternative treatment for pre-trading expenditure: deemed trading loss
(1)
A company is entitled to corporation tax relief for an accounting period if it meets F12each of conditions A to D.
(2)
Condition A is that the company is a small or medium-sized enterprise in the period.
F13(2A)
Condition B is that the company—
(a)
meets the R&D intensity condition in the period, or
(b)
obtained relief under this Chapter for its most recent prior accounting period of 12 months’ duration, having met the R&D intensity condition in that period.
F14(3)
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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
(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.
F15(4A)
Condition D is that the company is not an ineligible company (see section 1142).
(5)
(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 F18186% of the qualifying Chapter 2 expenditure.
(8)
If a company makes an election under this section in respect of qualifying Chapter 2 expenditure, section 61 (pre-trading expenses) does not apply to the expenditure.
F19(9)
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(10)
For the meaning of “qualifying Chapter 2 expenditure” see section 1051.
(11)
See also section 1137, which makes provision about the accounting periods of a company which is not within the charge to corporation tax.
F201045ZAR&D intensity condition
(1)
This section determines whether a company meets the R&D intensity condition in an accounting period for the purposes of sections 1044 and 1045.
(2)
If the company is not connected with another company, the company meets the condition if its relevant R&D expenditure for the period amounts to at least 30% of its total relevant expenditure for the period.
(3)
If the company is connected with at least one other company, the company meets the condition if the connected companies’ relevant R&D expenditure for the period amounts to at least 30% of the connected companies’ total relevant expenditure for the period.
(4)
In subsection (3), “the connected companies” refers to the company to which this section is being applied and each company with which it is connected; and the references to their expenditure are to the aggregate of each of their expenditures.
(5)
Expenditure forms part of a company’s total relevant expenditure for an accounting period if—
(a)
in accordance with generally accepted accounting practice, it is brought into account in calculating the profits for the period of any trade carried on by the company,
(b)
it is expenditure in respect of which the company is, for the period, entitled to relief under section 1045, or
(c)
in reliance on section 1308(2) (expenditure brought into account in determining value of intangible asset allowable as a deduction), it is brought into account in calculating the company’s profits for the period for corporation tax purposes.
(6)
But—
(a)
expenditure of a company is to be ignored for the purposes of subsection (5) if it consists of a payment, or other transfer of value, to another company with which the company is connected, and
(b)
where expenditure forms part of a company's total relevant expenditure by virtue of subsection (5)(c), a deduction brought into account as mentioned in subsection (5)(a) is to be ignored for the purposes of that provision to the extent that a corresponding deduction for corporation tax purposes is prevented by section 1308(5).
(7)
Expenditure forms part of a company’s relevant R&D expenditure for an accounting period if—
(a)
(b)
it is expenditure in respect of which the company would, assuming that it met the R&D intensity condition, be entitled to relief under this Chapter for the period.
(8)
For the purposes of this section in its application to an accounting period, a company is to be treated as connected with another company if it is connected with that company on any day within the period.
Reliefs: further provision
F211045ARequirement to make a claim notification
(1)
A company may not make a claim under section 1044(6) (an “additional deduction claim”) after the end of the claim notification period unless—
(a)
the company has made an R&D claim during the period of three years ending with the last day of the claim notification period,
(b)
the company makes a claim notification in respect of the additional deduction claim within the claim notification period, or
(c)
the accounting period in respect of which the additional deduction claim is made falls within the same period of account as another accounting period in respect of which the company has made an R&D claim or a claim notification.
(2)
For the purposes of subsection (1)(a) ignore any R&D claim for an accounting period beginning before 1 April 2023 that is included in the company’s company tax return only by virtue of an amendment made on or after that date (see paragraph 83B(2) of Schedule 18 to FA 1998).
F221046Relief only available where company is going concern
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1047Elections under section 1045
(1)
An election under section 1045 must specify the accounting period in respect of which it is made.
(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.
1048Treatment 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 F23(“the deemed loss-making period”).
(2)
(3)
Subsection (4) applies if—
F26(za)
the deemed loss-making period begins before 1 April 2017,
(a)
the company begins, in F27the deemed loss-making period or a later period, to carry on a trade, and
(b)
the trade is derived from the research and development in relation to 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 F28Part 5 of CTA 2010 (group relief),
the trading loss is to be treated as if it were a loss of that trade brought forward under F29section 45 of CTA 2010 (relief of trading losses against future trading profits).
F30(4A)
Subsection (4B) applies if—
(a)
the deemed loss-making period begins on or after 1 April 2017,
(b)
the company—
(i)
begins to carry on a trade in the deemed loss-making period which it continues to carry on in the following accounting period, or
(ii)
begins to carry on a trade in an accounting period after the deemed-loss making period, and
(c)
the trade is derived from the research and development in relation to which the relief mentioned in subsection (1) was obtained.
(4B)
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 Part 5 of CTA 2010 (group relief) (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 the relevant provision (see subsection (4C)) to the relevant period (see subsection (4D).
(4C)
In subsection (4B) “the relevant provision” is—
(a)
section 45A(4) of CTA 2010 if—
(i)
the trade is not a ring fence trade within the meaning of Part 8 of CTA 2010 (see section 277 of that Act), and
(ii)
relief under section 37 of CTA 2010 would not be unavailable by reason of section 44 of that Act for a loss (assuming there was one) made in the trade in the relevant period (see subsection (4D), and
(b)
section 45B(2) of CTA 2010 if either of the conditions in paragraph (a) is not met.
(4D)
In subsection (4B) and (4C) “the relevant period” means—
(a)
in a case where the company began the trade in the deemed loss-making period and continued to carry on the trade in the following accounting period, that following accounting period, and
(b)
in a case where the company began the trade in an accounting period after the deemed loss-making period, the accounting period in which the company began the trade.
(5)
F31Subsections (4) and (4B) are subject to section 1062 (restriction on losses carried forward where tax credit claimed).
1049Restriction 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,
(b)
at any time during the period the company is owned by a consortium, and
(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.
(3)
A “consortium group relief claim” means a claim to group relief F32based on consortium condition 1, 2 or 3 in sections 132 and 133 of CTA 2010 (group relief available between members of consortia).
Threshold
F331050R&D threshold
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Qualifying expenditure
1051Qualifying Chapter 2 expenditure
F351052Qualifying expenditure: in-house R&D
(1)
Expenditure of a company is qualifying Chapter 2 expenditure if it meets each of conditions A to D in this section.
(2)
Condition A is that the expenditure is attributable to relevant research and development undertaken by the company itself.
(3)
Condition B is that the expenditure is—
(a)
incurred on staffing costs (see section 1123),
(b)
incurred on software, data licences, cloud computing services 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).
(4)
Condition C is that the research and development is not contracted out to the company (see section 1133).
(5)
Condition D is that the expenditure is not attributable to an exempt foreign permanent establishment (see section 1138B).
(6)
1053Qualifying expenditure: payments for contracted out R&D
(1)
Expenditure of a company is qualifying Chapter 2 expenditure if it meets each of conditions A to D in this section.
(2)
Condition A is that the expenditure is attributable to relevant research and development contracted out by the company (see section 1133).
(3)
Condition B is that the research and development is not also contracted out to the company (see section 1133).
(4)
Condition C is that the expenditure is incurred in making the qualifying element of a contractor payment (see sections 1133 to 1136).
(5)
Condition D is that the expenditure is not attributable to an exempt foreign permanent establishment (see section 1138B).
(6)
See sections 1124, 1126 to 1126B and 1132 for provision about when particular kinds of expenditure are attributable to relevant research and development.
1053AQualifying expenditure: activity as contractor for irrelievable client
(1)
Expenditure of a company is qualifying Chapter 2 expenditure if it meets conditions A, B and C in this section.
(2)
Condition A is that the expenditure is attributable to relevant research and development contracted out to the company (see section 1133).
(3)
Condition B is that subsection (4) is satisfied by each person by whom the research and development is contracted out to the company.
(4)
A person satisfies this subsection if—
(a)
the person is an ineligible company (see section 1142), or
(b)
the person is not, in relation to the contracting out of the research and development by that person, acting in the course of a trade, profession or vocation within the charge to tax.
(5)
Tax credit: entitlement and payment
1054Entitlement to and payment of tax credit
(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)
(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 company the amount of the credit.
This is subject to section F381112H.
F39(5)
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(6)
See also section 1062, which restricts the carry forward of losses where a company claims an R&D tax credit.
F401054ARequirement to make a claim notification
(1)
A company may not make a claim under section 1054(2) (an “R&D tax credit claim”) after the end of the claim notification period unless—
(a)
the company has made an R&D claim during the period of three years ending with the last day of the claim notification period,
(b)
the company makes a claim notification in respect of the R&D tax credit claim within the claim notification period, or
(c)
the accounting period in respect of which the R&D tax credit claim is made falls within the same period of account as another accounting period in respect of which the company has made an R&D claim or a claim notification.
(2)
For the purposes of subsection (1)(a) ignore any R&D claim for an accounting period beginning before 1 April 2023 that is included in the company’s company tax return only by virtue of an amendment made on or after that date (see paragraph 83B(2) of Schedule 18 to FA 1998).
1055Meaning 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 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—
(a)
so much of the trading loss as is unrelieved, or
(b)
if less, F41186% 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.
1056Amount of trading loss which is “unrelieved”
(1)
This section applies for the purposes of section 1055.
(2)
The amount of a trading loss that is “unrelieved” is the amount of the loss reduced by—
(a)
any relief that was or could have been obtained by the company making a claim under F42section 37(3)(a) of CTA 2010 to deduct the loss from total profits of the same accounting period,
(b)
any other relief obtained by the company in respect of the loss, including relief under F43section 37(3)(b) or 42 of CTA 2010 (losses deducted from profits of an earlier accounting period), and
(3)
No account is to be taken for this purpose of any losses—
(a)
(b)
carried back from a later accounting period under F48section 37(3)(b) or 42 of that Act.
F491057Tax credit only available where company is going concern
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Amount of tax credit
1058Amount of tax credit
(1)
The amount of the R&D tax credit to which a company is entitled for an accounting period is F50the lesser of—
F54(aa)
the amount of the cap by reference to the company’s PAYE and NIC liabilities for the accounting period (see section 1112B).
F52(b)
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F55(1A)
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F55(1B)
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F55(1C)
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F56(2)
The Treasury may by regulations—
(a)
replace the percentage for the time being specified in subsection (1)(a) with a different percentage;
F57(b)
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F58(c)
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F59(3)
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F601058ARelevant expenditure on workers
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F601058BTotal amount of company's PAYE and NIC liabilities
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F601058CAvoiding double counting of PAYE and NIC liabilities
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F601058DExceptions to tax credit cap
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F611059Total amount of company's PAYE and NIC liabilities
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Supplementary
1060F62Use of credit to pay corporation tax
(1)
This section applies if an R&D tax credit for an accounting period is payable to a company under this Chapter.
(2)
The amount payable in respect of—
(a)
the R&D tax credit, or
(b)
interest on the credit payable under section 826 of ICTA,
may be applied in discharging any liability of the company to pay corporation tax.
(3)
So far as the amount is so applied, the duty of the officer of Revenue and Customs to pay the credit under section 1054(4) is discharged.
F63(4)
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F63(5)
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F63(6)
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F63(7)
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1061Tax credit payment not income of company
A payment in respect of an R&D tax credit under this Chapter is not income of the company for any tax purposes.
1062Restriction on losses carried forward where tax credit claimed
(1)
This section applies if a company claims an R&D tax credit to which it is entitled for an accounting period.
(2)
(3)
The “amount of the surrendered loss” for the period means the amount of the Chapter 2 surrenderable loss in respect of which the company claims an R&D tax credit for the period.
F671062AInsurance company to be treated as large company
An insurance company that carries on life assurance business in an accounting period is not to be treated for the purposes of this Chapter as a small or medium-sized enterprise in relation to that period.