Corporation Tax Act 2009

Chapter 9 Supplementary

SMEs and large companies

1119 “Small or medium-sized enterprise”

(1) In this Part “small or medium-sized enterprise” means a micro, small or medium-sized enterprise as defined in Commission Recommendation (EC) No 2003/361, but subject to the qualifications in section 1120.

(2) The Treasury may by order amend this section or section 1120 to substitute a different definition of “small or medium-sized enterprise” for the purposes of this Part.

(3) This section is subject to section 1081 (insurance companies to be treated as large companies for purposes of Chapters 2 to 5).

1120 Qualifications to section 1119

(1) This section contains qualifications to the definition of small or medium-sized enterprise in section 1119.

(2) The qualifications are—

• Qualification 1

  In Article 2(1) of the Annex, the references to 250 persons, 50 million euros and 43 million euros are to be read as references to 500 persons, 100 million euros and 86 millions euros (respectively).

• Qualification 2

  If each of conditions A to D is met, Article 4(2) of the Annex is to be disregarded in determining whether a company (“C”) is within the definition of small or medium-sized enterprise in section 1119 for an accounting period in which C exceeds the employee limit or the financial limits.

(3) Condition A is that C is a micro, small or medium-sized enterprise as defined in the Recommendation (or would be if the Annex were read as set out in qualification 1), disregarding any partner enterprise or linked enterprise.

(4) Condition B is that a partner enterprise or linked enterprise to which C is related exceeds the employee limit or both of the financial limits, disregarding the number of employees, the annual turnover and the annual balance sheet totals of C.

(5) Condition C is that the number of employees, annual turnover or annual balance sheet total (as the case may be) of the partner enterprise or linked enterprise to which C is related has been taken into account in determining whether C exceeded the employee limit or the financial limits.

(6) Condition D is that, taken alone, C satisfies the employee limit and at least one of the financial limits.

(7) In this section—

(a) references to the Recommendation are to the Commission Recommendation mentioned in section 1119(1),

(b) references to the Annex are to the Annex to the Recommendation,

(c) references to the employee limit are to the limit on the number of employees contained in Article 2(1) of the Annex (read as set out in qualification 1), and

(d) references to the financial limits are to the limits on the annual turnover and balance sheet totals contained in Article 2(1) of the Annex (read as set out in qualification 1).

1121 “Larger SME”

References in this Part to a “larger SME” are to a company which is a small or medium-sized enterprise by virtue of qualification 1 in section 1120.

1122 “Large company”

In this Part “large company” means a company that is not a small or medium-sized enterprise.

Staffing costs

1123 “Staffing costs”

(1) For the purposes of this Part the staffing costs of a company are amounts to which subsection (2), (3), (4), (5) or (7) applies.

(2) This subsection applies to an amount paid by the company to a director or an employee of the company which—

(a) is earnings consisting of money, and

(b) is paid because of the director’s or employee’s employment.

(3) This subsection applies to an amount paid by the company to a director or an employee of the company, other than an amount paid in respect of benefits in kind, if—

(a) the amount is paid in respect of expenses paid by the director or employee, and

(b) the amount is paid because of the director’s or employee’s employment.

(4) This subsection applies to secondary Class 1 national insurance contributions paid by the company.

(5) This subsection applies to compulsory contributions paid by the company in respect of benefits for directors or employees of the company under the social security legislation of an EEA State (other than the United Kingdom) or Switzerland.

(6) In subsection (5) “social security legislation” means legislation relating to any of the branches of social security listed in Article 3(1) of Regulation (EC) No. 883/2004 of the European Parliament and of the Council on the co-ordination of social security systems (as amended from time to time).

(7) This subsection applies to contributions paid by the company to a pension fund operated for the benefit of directors or employees of the company.

(8) In subsection (7) “pension fund” means a scheme, fund or other arrangement established and maintained (whether in the United Kingdom or elsewhere) for the purpose of providing pension benefits.

For this purpose “scheme” includes a deed, agreement or series of agreements.

(9) In subsection (8) “pension benefits” means pensions, retirement annuities, allowances, lump sums, gratuities or other superannuation benefits (with or without subsidiary benefits).

1124 Staffing costs: attributable expenditure

(1) This section applies for the purposes of this Part to identify when staffing costs are attributable to relevant research and development.

(2) The costs which are so attributable are those paid to, or in respect of, directors or employees who are directly and actively engaged in relevant research and development.

(3) Subsection (4) applies if a director or employee is partly engaged directly and actively in relevant research and development.

(4) The appropriate proportion of the staffing costs relating to the director or employee is treated as attributable to relevant research and development.

(5) Subsection (6) applies if persons provide services, such as secretarial or administrative services, in support of activities carried on by others.

(6) Those persons are not, as a result of providing those services, to be treated as themselves directly and actively engaged in those activities.

Software or consumable items

1125 “Software or consumable items”

(1) For the purposes of this Part expenditure on software or consumable items means expenditure on—

(a) computer software, or

(b) consumable or transformable materials.

(2) For the purposes of subsection (1)(b) consumable or transformable materials include water, fuel and power.

1126 Software or consumable items: attributable expenditure

(1) This section applies for the purposes of this Part to identify when expenditure on software or consumable items is attributable to relevant research and development.

(2) Expenditure on software or consumable items is so attributable if the software or consumable items are employed directly in relevant research and development.

(3) Subsection (4) applies if software or consumable items are partly employed directly in relevant research and development.

(4) The appropriate proportion of the expenditure on the software or consumable items is treated as attributable to relevant research and development.

(5) Subsection (6) applies if software or consumable items are employed in the provision of services, such as secretarial or administrative services, in support of other activities.

(6) The software or consumable items are not, as a result of their employment in the provision of those services, to be treated as themselves directly employed in those activities.

Qualifying expenditure on externally provided workers

1127 “Qualifying expenditure on externally provided workers”

(1) For the purposes of this Part a company incurs expenditure on externally provided workers if—

(a) it makes a payment (a “staff provision payment”) to another person (the “staff provider”), and

(b) the payment is in respect of the supply to the company, by or through the staff provider, of the services of any externally provided workers.

(2) The company’s qualifying expenditure on externally provided workers is determined in accordance with section 1129 or 1131.

(3) In sections 1128 to 1131 references to “staff provider” and “staff provision payment” are to be read in accordance with subsection (1).

1128 “Externally provided worker”

(1) For the purposes of this Part a person is an “externally provided worker” in relation to a company if each of conditions A to G is met.

(2) Condition A is that the worker is an individual.

(3) Condition B is that the worker is not a director or employee of the company.

(4) Condition C is that the worker personally provides, or is under an obligation personally to provide, services to the company.

(5) Condition D is that the worker is subject to (or to the right of) supervision, direction or control by the company as to the manner in which those services are provided.

(6) Condition E is that the worker’s services are supplied to the company through a staff provider (whether or not the worker is a director or employee of the staff provider or any other person).

(7) Condition F is that the worker provides, or is under an obligation to provide, those services personally to the company under the terms of a contract between the worker and the staff provider.

(8) Condition G is that the provision of those services does not constitute the carrying on of activities contracted out by the company.

1129 Qualifying expenditure on externally provided workers: connected persons

(1) This section applies if—

(a) a company makes a staff provision payment,

(b) the company and the staff provider are connected, and

(c) in accordance with generally accepted accounting practice, the whole of the staff provision payment and all of the staff provider’s relevant expenditure have been brought into account in determining the staff provider’s profit or loss for a relevant period.

(2) The company’s qualifying expenditure on externally provided workers is—

(a) the entire staff provision payment, or

(b) if less, an amount equal to the staff provider’s relevant expenditure.

(3) “Relevant expenditure” of the staff provider means expenditure that—

(a) is incurred by the staff provider in providing for the company the externally provided workers to whom the staff provision payment relates,

(b) is not of a capital nature, and

(c) is incurred on staffing costs or agency workers' remuneration.

(4) “Relevant period” means a period—

(a) for which accounts are drawn up for the staff provider, and

(b) that ends not more than 12 months after the end of the company’s period of account in which the staff provision payment is, in accordance with generally accepted accounting practice, brought into account in determining the company’s profit or loss.

(5) In section 1123 (meaning of “staffing costs”), which applies for the purpose of determining whether the staff provider’s expenditure meets the requirements of subsection (3)(c), references to a company are to be read as references to the staff provider.

(6) “Agency workers' remuneration”, in the case of any person who is an externally provided worker in relation to the company, means remuneration that—

(a) is receivable by the worker under or in consequence of the contract mentioned in section 1128(7), but

(b) does not constitute employment income of the worker apart from Chapter 7 of Part 2 of ITEPA 2003 (application of provisions to agency workers).

(7) Any apportionment of expenditure of the company or staff provider necessary for the purposes of this section is to be made on a just and reasonable basis.

1130 Election for connected persons treatment

(1) A company and a staff provider who are not connected may jointly elect that section 1129 is to apply to them as if they were connected.

(2) Any such election must be made in relation to all staff provision payments paid under the same contract or other arrangement.

(3) The election must be made by notice in writing to an officer of Revenue and Customs.

(4) The notice must be given before the end of the period of two years beginning immediately after the end of the company’s accounting period in which the contract or other arrangement is entered into.

(5) An election under this section is irrevocable.

1131 Qualifying expenditure on externally provided workers: other cases

(1) This section applies if—

(a) a company makes a staff provision payment,

(b) the company and the staff provider are not connected persons, and

(c) no election is made under section 1130.

(2) The company’s qualifying expenditure on externally provided workers is 65% of the staff provision payment.

1132 External workers: attributable expenditure

(1) This section applies for the purposes of this Part to identify when qualifying expenditure on externally provided workers is attributable to relevant research and development.

(2) Qualifying expenditure on externally provided workers is so attributable if the workers are directly and actively engaged in relevant research and development.

(3) Subsection (4) applies if an externally provided worker is partly engaged directly and actively in relevant research and development.

(4) The appropriate proportion of the qualifying expenditure relating to the worker is treated as attributable to relevant research and development.

(5) Subsection (6) applies if persons provide services (such as secretarial or administrative services) in support of activities carried on by others.

(6) Those persons are not, as a result of providing those services, to be treated as themselves directly and actively engaged in those activities.

Sub-contractor payments

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

(1) In this Part a “sub-contractor payment” means a payment made by a company to another person (“the sub-contractor”) in respect of research and development contracted out by the company to that person.

(2) Sections 1134 to 1136 apply if a company makes a sub-contractor payment.

(3) They apply for the purpose of determining the qualifying element of the payment for the purposes of—

• section 1053(1)(a),

• section 1072(1)(a), and

• section 1102(2).

1134 Qualifying element of sub-contractor payment: connected persons

(1) This section applies if—

(a) a company makes a sub-contractor payment,

(b) the company and the sub-contractor are connected, and

(c) in accordance with generally accepted accounting practice, the whole of the sub-contractor payment and all of the sub-contractor’s relevant expenditure have been brought into account in determining the sub-contractor’s profit or loss for a relevant period.

(2) The qualifying element of the sub-contractor payment is—

(a) the entire payment, or

(b) if less, an amount equal to the sub-contractor’s relevant expenditure.

(3) “Relevant expenditure” of the sub-contractor means expenditure that—

(a) is incurred by the sub-contractor in carrying on, on behalf of the company, the activities to which the sub-contractor payment relates,

(b) is not of a capital nature,

(c) is incurred on staffing costs, software or consumable items or relevant payments to the subjects of a clinical trial or is qualifying expenditure on externally provided workers, and

(d) is not subsidised.

(4) “Relevant period” means a period—

(a) for which accounts are drawn up for the sub-contractor, and

(b) that ends not more than 12 months after the end of the company’s period of account in which the sub-contractor payment is, in accordance with generally accepted accounting practice, brought into account in determining the company’s profit or loss.

(5) In the following sections, which apply for the purpose of determining whether a sub-contractor’s expenditure meets the requirements of subsection (3)(c) and (d)—

(a) section 1123 (staffing costs),

(b) sections 1127 to 1131 (qualifying expenditure on externally provided workers), and

(c) section 1138 (subsidised expenditure),

references to a company are to be read as references to the sub-contractor.

(6) Any apportionment of expenditure of the company or the sub-contractor necessary for the purposes of this section is to be made on a just and reasonable basis.

1135 Election for connected persons treatment

(1) A company and a sub-contractor who are not connected may jointly elect that section 1134 is to apply to them as if they were connected.

(2) Any such election must be made in relation to all sub-contractor payments paid under the same contract or other arrangement.

(3) The election must be made by notice in writing to an officer of Revenue and Customs.

(4) The notice must be given before the end of the period of two years beginning immediately after the end of the company’s accounting period in which the contract or other arrangement is entered into.

(5) An election under this section is irrevocable.

1136 Qualifying element of sub-contractor payment: other cases

(1) This section applies if—

(a) a company makes a sub-contractor payment,

(b) the company and the sub-contractor are not connected persons, and

(c) no election is made under section 1135.

(2) The qualifying element of the sub-contractor payment is 65% of the sub-contractor payment.

Miscellaneous

1137 Accounting periods: company not within charge to corporation tax

(1) This section applies to a company if—

(a) it is not within the charge to corporation tax, and

(b) it incurs qualifying Chapter 2 expenditure or qualifying Chapter 7 expenditure.

(2) For the purposes of this Part the company is treated as having the accounting periods it would have if—

(a) it carried on a trade consisting of the activities in respect of which the expenditure is incurred, and

(b) it had started to carry on that trade when it started to carry on relevant research and development.

1138 “Subsidised expenditure”

(1) For the purposes of this Part a company’s expenditure is treated as subsidised—

(a) if a notified State aid is, or has been, obtained in respect of—

(i) the whole or part of the expenditure, or

(ii) any other expenditure (whenever incurred) attributable to the same research and development project,

(b) to the extent that a grant or subsidy (other than a notified State aid) is obtained in respect of the expenditure,

(c) to the extent that it is otherwise met directly or indirectly by a person other than the company.

(2) In this section “notified State aid” means a State aid notified to and approved by the European Commission.

(3) For this purpose the following are not State aids—

(a) relief under this Part, and

(b) R&D tax credits under this Part.

(4) For the purposes of this Part a notified State aid, grant, subsidy or payment that is not allocated to particular expenditure is to be allocated to expenditure of the recipient on a just and reasonable basis.

1139 “Intellectual property”

In this Part “intellectual property” means—

(a) industrial information or techniques likely to assist in—

(i) the manufacture or processing of goods or materials, or

(ii) the working of a mine, oil well or other source of mineral deposits or the winning of access to them, or

(iii) the carrying out of any agricultural, forestry or fishing operations,

(b) a patent, trade mark, registered design, copyright, design right or plant breeder’s right, and

(c) a right under the law of a country outside the United Kingdom which corresponds or is similar to any of those falling within paragraph (b).

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

(1) For the purposes of this Part “relevant payment”, in relation to a subject of a clinical trial, means a payment made to the subject for participating in the trial.

(2) For the purposes of this Part “clinical trial” means an investigation in human subjects undertaken in connection with the development of a health care treatment or procedure.

1141 “Payment period”

In this Part a “payment period” means a period—

(a) which ends on the fifth day of a month, and

(b) for which the company is liable to account for income tax and national insurance contributions to an officer of Revenue and Customs.

1142 “Qualifying body”

(1) For the purposes of this Part “qualifying body” means—

(a) a charity,

(b) an institution of higher education,

(c) an association of a description specified in section 508 of ICTA (scientific research organisation),

(d) a health service body within the meaning of section 519A(2) of that Act, or

(e) any other body prescribed, or of a description prescribed, by the Treasury, by order, for the purposes of this Part.

(2) In subsection (1)(b) “institution of higher education” means—

(a) an institution within the higher education sector within the meaning of the Further and Higher Education Act 1992 (c. 13),

(b) an institution within the higher education sector within the meaning of Part 2 of the Further and Higher Education (Scotland) Act 1992 (c. 37) or a central institution within the meaning of the Education (Scotland) Act 1980 (c. 44), or

(c) a higher education institution within the meaning of Article 30(3) of the Education and Libraries (Northern Ireland) Order 1993 (S.I. 1993/2810 (N.I. 12)).

(3) An order under this section is to have effect in relation to the accounting periods or expenditure specified in the order.

(4) The order may specify accounting periods beginning, or expenditure incurred, before the time the order is made.