Finance Bill - continued        House of Lords

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SCHEDULE 20
 
  TAX RELIEF FOR EXPENDITURE ON RESEARCH AND DEVELOPMENT
  PART I
  ENTITLEMENT TO RELIEF
 
Entitlement to R&D tax relief
     1. - (1) A company is entitled to R&D tax relief for an accounting period if-
 
 
    (a) the company qualifies as a small or medium-sized enterprise in the period (see paragraph 2), and
 
    (b) the company's qualifying R&D expenditure (see paragraph 3) deductible in that period is not less than-
 
      (i) £25,000, if the accounting period is a period of 12 months, or
 
      (ii) such amount as bears to £25,000 the same proportion as the accounting period bears to 12 months.
      (2) For the purposes of sub-paragraph (1) a company's qualifying R&D expenditure is deductible in an accounting period if-
 
 
    (a) it is allowable as a deduction in computing for tax purposes the profits for that period of a trade carried on by the company, or
 
    (b) it would have been allowable as such a deduction had the company, at the time the expenditure was incurred, been carrying on a trade consisting of the activities in respect of which it was incurred.
      (3) For the purposes of sub-paragraph (2)(a) no account shall be taken of section 401 of the Taxes Act 1988 (pre-trading expenditure treated as incurred when trading begins).
 
      (4) In relation to an accounting period beginning before and ending on or after 1st April 2000, the references in sub-paragraph (1)(b)(i) and (ii) to the accounting period shall be read as references to so much of it as falls on or after that date.
 
 
Meaning of "small or medium-sized enterprise"
     2. - (1) For the purposes of this Schedule a "small or medium-sized enterprise" means a small or medium-sized enterprise as defined in Commission Recommendation 96/280/EC of 3rd April 1996.
 
      (2) The Treasury may by order amend sub-paragraph (1) so as to substitute another definition of "small or medium-sized enterprise" for the definition that is for the time being effective for the purposes of this Schedule.
 
 
Qualifying R&D expenditure
     3. - (1) For the purposes of this Schedule "qualifying R&D expenditure" of a company means expenditure that meets the following conditions.
 
      (2) The first condition is that the expenditure is not of a capital nature.
 
      (3) The second condition is that the expenditure is attributable to relevant research and development (see paragraph 4) directly undertaken by the company or on its behalf.
 
      (4) The third condition is that the expenditure is incurred-
 
 
    (a) on staffing costs (see paragraph 5), or
 
    (b) on consumable stores (see paragraph 6),
       or is qualifying expenditure on sub-contracted research and development (see paragraphs 9 to 12).
 
      (5) The fourth condition is that any intellectual property (see paragraph 7) created as a result of the research and development to which the expenditure is attributable is, or will be, vested in the company (whether alone or with other persons).
 
      (6) The fifth condition is that the expenditure is not incurred by the company in carrying on activities the carrying on of which is contracted out to the company by any person.
 
      (7) The sixth condition is that the expenditure is not subsidised (see paragraph 8).
 
 
Relevant research and development
     4. - (1) For the purposes of this Schedule "relevant research and development", in relation to a company, means research and development-
 
 
    (a) related to a trade carried on by the company, or
 
    (b) from which it is intended that a trade to be carried on by the company will be derived.
      (2) For the purposes of this Schedule research and development related to a trade carried on by the company includes-
 
 
    (a) research and development which may lead to or facilitate an extension of that trade, and
 
    (b) research and development of a medical nature which has a special relation to the welfare of workers employed in that trade.
 
Staffing costs
     5. - (1) For the purposes of this Schedule the staffing costs of a company are-
 
 
    (a) the emoluments paid by the company to directors or employees of the company, including all salaries, wages, perquisites and profits whatsoever other than benefits in kind;
 
    (b) the secondary Class 1 national insurance contributions paid by the company; and
 
    (c) the contributions paid by the company to any pension fund (within the meaning of section 231A(4) of the Taxes Act 1988) operated for the benefit of directors or employees of the company.
      (2) The staffing costs of a company attributable to relevant research and development are those paid to, or in respect of, directors or employees directly and actively engaged in such research and development.
 
      (3) In the case of a director or employee partly engaged directly and actively in relevant research and development the following rules apply-
 
 
    (a) if the time he spends so engaged is less than 20% of his total working time, none of the staffing costs relating to him are treated as attributable to relevant research and development;
 
    (b) if the time he spends so engaged is more than 80% of his total working time, the whole of the staffing costs relating to him are treated as attributable to relevant research and development;
 
    (c) in any other case, an appropriate proportion of the staffing costs relating to him are treated as attributable to relevant research and development.
      (4) For the purpose of sub-paragraphs (2) and (3) persons who provide services, such as secretarial or administrative services, in support of activities carried on by others, are not, by virtue of providing those services, to be treated as themselves directly and actively engaged in those activities.
 
 
Expenditure on consumable stores
     6. - (1) For the purposes of this Schedule expenditure on consumable stores means expenditure that would be treated as expenditure on consumable stores in accordance with normal accounting practice.
 
      (2) Expenditure on consumable stores is attributable to relevant research and development if the stores are employed directly in such research and development.
 
 
Meaning of "intellectual property"
     7. In this Schedule "intellectual property" means-
 
 
    (a) any 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 thereto, or
 
      (iii) the carrying out of any agricultural, forestry or fishing operations;
 
    (b) any patent, trade mark, registered design, copyright, design right or plant breeder's right; and
 
    (c) any rights under the law of a country outside the United Kingdom which correspond or are similar to those falling within paragraph (b).
 
Subsidised expenditure
     8. - (1) For the purposes of this Schedule 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 any person other than the company.
      (2) For the purposes of sub-paragraph (1) "notified State aid" means a State aid notified to and approved by the European Commission.
 
      R&D tax relief and R&D tax credits are not State aids for this purpose.
 
      (3) For the purposes of this Schedule a notified State aid, grant, subsidy or payment that is not allocated to particular expenditure shall be allocated to expenditure of the recipient in such manner as is just and reasonable.
 
 
Qualifying expenditure on sub-contracted research and development
     9. - (1) The provisions of paragraphs 10 to 12 have effect for determining the amount of the qualifying expenditure of a company ("the company") on sub-contracted research and development.
 
      (2) For the purposes of this Schedule the company incurs expenditure on sub-contracted research and development if it makes a payment (a "sub-contractor payment") to another person ("the sub-contractor") in respect of relevant research and development contracted out by the company to that person.
 
 
Treatment of expenditure where company and sub-contractor are connected persons
     10. - (1) Where-
 
 
    (a) the company and the sub-contractor are connected persons, and
 
    (b) in accordance with normal accounting practice-
 
      (i) the whole of the sub-contractor payment has been brought into account in determining the sub-contractor's profit or loss for a relevant period, and
 
      (ii) all of the sub-contractor's relevant expenditure has been so brought into account,
 
    the whole of the payment (up to the amount of the sub-contractor's relevant expenditure) is qualifying expenditure on sub-contracted research and development.
      (2) In sub-paragraph (1)-
 
 
    (a) references to the "relevant expenditure" of the sub-contractor are to expenditure that-
 
      (i) is incurred by the sub-contractor in carrying on, on behalf of the company, the activities to which the sub-contractor payment relates,
 
      (ii) is not of a capital nature,
 
      (iii) is incurred on staffing costs or on consumable stores, and
 
      (iv) is not subsidised;
 
    (b) a "relevant period" means a period
 
      (i) for which accounts are drawn up for the sub-contractor, and
 
      (ii) that ends not more than twelve months after the end of the company's period of account in which the sub-contactor payment is, in accordance with normal accounting practice, brought into account in determining the company's profit or loss.
      (3) Paragraph 5 (staffing costs) and paragraph 8 (subsidised expenditure) apply for the purposes of determining whether the sub-contractor's expenditure meets the requirements of sub-paragraph (2)(a)(iii) and (iv).
 
  For this purpose the references in those paragraphs to a company shall be read as references to the sub-contractor.
 
      (4) Any apportionment of expenditure of the company or the sub-contractor necessary for the purposes of this paragraph shall be made on a just and reasonable basis.
 
 
Election for connected persons treatment
     11. - (1) The company and the sub-contractor may in any case jointly elect that paragraph 10 shall apply to sub-contractor payments made by the company to the sub-contractor.
 
      (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 given to the Inland Revenue.
 
      (4) The notice must be given before the end of the period of two years beginning with the end of the company's accounting period in which the contract or other arrangement is entered into.
 
      (5) An election under this paragraph, once made, is irrevocable.
 
 
Treatment of sub-contractor payment in other cases
     12. Where-
 
 
    (a) the company makes a sub-contractor payment, and
 
    (b) paragraph 10 (treatment of expenditure where company and sub-contractor are connected) does not apply,
       65% of the amount of the sub-contractor payment is treated as qualifying expenditure on sub-contracted research and development.
 
  PART II
  MANNER OF GIVING EFFECT TO RELIEF
 
Deduction in computing profits of trade
     13. Where-
 
 
    (a) a company is entitled to R&D tax relief for an accounting period,
 
    (b) it is carrying on a trade in that period, and
 
    (c) it has qualifying R&D expenditure that is allowable as a deduction in computing for tax purposes the profits of the trade for that period,
       it may (on making a claim) treat that qualifying R&D expenditure as if it were an amount equal to 150% of the actual amount.
 
 
Alternative treatment of pre-trading expenditure
     14. - (1) This paragraph applies where a company-
 
 
    (a) is entitled to R&D tax relief for an accounting period, and
 
    (b) has incurred qualifying R&D expenditure in that accounting period which-
 
      (i) is not allowable as a deduction in computing, for tax purposes, the profits of a trade that was carried on by it at the time the expenditure was incurred, but
 
      (ii) would have been so allowable had the company, at that time, been carrying on a trade consisting of the activities in respect of which the expenditure was incurred.
      (2) The company may elect to be treated as if it had incurred a trading loss in the accounting period equal to 150% of the amount of that qualifying R&D expenditure.
 
      (3) Where an election is made under this paragraph in respect of the accounting period, section 401 of the Taxes Act 1988 (relief for pre-trading expenditure) does not apply to that qualifying R&D expenditure.
 
      (4) An election under this paragraph must specify the accounting period in respect of which it is made.
 
      (5) The election must be made by notice in writing to the Inland Revenue.
 
      (6) The notice must be given before the end of the period of two years beginning with the end of the company's accounting period to which the election relates.
 
 
Entitlement to R&D tax credit
     15. - (1) A company may claim an R&D tax credit for an accounting period in which it has a surrenderable loss.
 
      (2) A company has a "surrenderable loss" for this purpose if in an accounting period-
 
 
    (a) paragraph 13 applies and the company incurs a trading loss in that period in the trade mentioned in sub-paragraph (1)(b) of that paragraph, or
 
    (b) paragraph 14 applies and the company is treated under that paragraph as incurring a trading loss.
      (3) The amount of the surrenderable loss is equal to-
 
 
    (a) so much of that trading loss as is unrelieved, or
 
    (b) if less, 150% of the related qualifying R&D expenditure.
      (4) For this purpose the amount of a trading loss that is "unrelieved" means the amount of that loss reduced by the amount of-
 
 
    (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), and
 
    (c) any loss surrendered under section 403(1) (surrender of relief to group or consortium members) of that Act.
      (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.
 
Amount of credit
     16. - (1) The amount of the R&D tax credit to which a company is entitled for an accounting period is an amount equal to-
 
 
    (a) 16% of the amount of the surrenderable loss for the period, or
 
    (b) if less, the total amount of the company's PAYE and NICs liabilities for payment periods ending in the accounting period.
      (2) The Treasury may by order substitute for the percentage for the time being specified in sub-paragraph (1)(a) such other percentage as they think fit.
 
      (3) An order under sub-paragraph (2) may make such incidental, supplemental, consequential and transitional provision as the Treasury think fit.
 
 
Total amount of company's PAYE and NICs liabilities
     17. - (1) For the purposes of paragraph 16 the total amount of the company's PAYE and NICs liabilities for a payment period is the total of-
 
 
    (a) the amount of income tax for which the company is required to account to the Inland Revenue for that period under the PAYE regulations, disregarding any deduction the company is authorised to make in respect of the working families' tax credit or disabled person's tax credit, and
 
    (b) the Class 1 national insurance contributions for which the company is required to account to the Inland Revenue for that period, disregarding any deduction the company is authorised to make in respect of payments of statutory sick pay, statutory maternity pay, working families' tax credit or disabled person's tax credit.
      (2) A "payment period" means a period which ends on the 5th day of a month and for which the company is liable to account for income tax and national insurance contributions to the Inland Revenue.
 
 
Payment in respect of R&D tax credit
     18. - (1) Where-
 
 
    (a) the company is entitled to an R&D tax credit 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) an R&D tax credit, or
 
    (b) interest on an R&D tax credit under section 826 of the Taxes Act 1988,
       may be applied in discharging any liability of the company's 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 an R&D tax credit 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).
 
  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 an R&D tax credit 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
     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 an R&D tax credit 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 R&D tax credit was claimed, the whole of the surrenderable loss for that period;
 
    (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 16(1)(a).
 
 
Payment in respect of R&D tax credit not income
     20. A payment in respect of an R&D tax credit is not income of the company for any tax purposes.
 
  PART III
  SUPPLEMENTARY PROVISIONS
 
Artificially inflated claims for deduction or R&D tax credit
     21. - (1) To the extent that a transaction is attributable to arrangements entered into wholly or mainly for a disqualifying purpose, it shall be disregarded in determining for an accounting period the amount of-
 
 
    (a) any relief to which a company is entitled under paragraph 13 or 14, and
 
    (b) any R&D tax credit to which a company is entitled.
      (2) Arrangements are entered into wholly or mainly for a "disqualifying purpose" if their main object, or one of their main objects, is to enable a company to obtain-
 
 
    (a) relief under paragraph 13 or 14 to which it would not otherwise be entitled or of a greater amount than that to which it would otherwise be entitled; or
 
    (b) an R&D tax credit to which it would not otherwise be entitled or of a greater amount than that to which it would otherwise be entitled.
      (3) In this paragraph "arrangements" includes any scheme, agreement or understanding, whether or not legally enforceable.
 
 
Restriction on consortium relief
     22. Where-
 
 
    (a) the company claims relief under paragraph 13 or 14 in respect of an accounting period, and
 
    (b) at any time during that period the company is owned by a consortium at least one of the members of which is a company which is not a small or medium-sized enterprise,
       no amount in respect of that period may be surrendered by the company, for the purposes of a claim to group relief under section 402(3) of the Taxes Act 1988 (group relief available where surrendering company owned by consortium), to any other company that is not a small or medium-sized enterprise.
 
 
Treatment of deemed trading loss
     23. - (1) This paragraph applies where under paragraph 14 (alternative treatment of pre-trading expenditure) a company is treated as incurring a trading loss in an accounting period ("the accounting period").
 
      (2) 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 is entitled to R&D tax relief under paragraph 14 above for that earlier period.
 
      (3) If the company begins, in the accounting period or a later period, to carry on a trade which falls within sub-paragraph (4), 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 the Taxes Act 1988 (relief of trading losses against future trading profits).
      (4) A trade falls within this sub-paragraph if it is derived from the research and development in relation to which the R&D tax relief in question was obtained under paragraph 14.
 
 
Funding of R&D tax credits
     24. Section 10 of the Exchequer and Audit Departments Act 1866 (gross revenues to be paid to Exchequer) shall be construed as allowing the Commissioners of Inland Revenue to deduct payments for or in respect of R&D tax credits before causing the gross revenues of their department to be paid to the accounts mentioned in that section.
 
 
Interpretation
     25. - (1) In this Schedule-
 
 
    "the Inland Revenue" means any officer of the Board;
 
    "national insurance contributions" means contributions under Part I of the Social Security Contributions and Benefits Act 1992 or Part I of the Social Security Contributions and Benefits (Northern Ireland) Act 1992;
 
    "normal accounting practice" means normal accounting practice in relation to the accounts of companies incorporated in any part of the United Kingdom;
 
    "PAYE regulations" means regulations under section 203 of the Taxes Act 1988;
 
    "payment period" has the meaning given in paragraph 17(2);
 
    "research and development" has the meaning given by section 837A of the Taxes Act 1988; and
 
    "surrenderable loss" has the meaning given in paragraph 15(2).
      (2) Section 839 of the Taxes Act 1988 (connected persons) applies for the purposes of this Schedule.
 
      (3) For the purposes of this Schedule a company not within the charge to corporation tax which incurs qualifying R&D expenditure is treated as having such accounting periods as 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.
 
Transitional provisions
     26. - (1) This Schedule does not apply to expenditure incurred before 1st April 2000.
 
      (2) For this purpose no account shall be taken of section 401 of the Taxes Act 1988 (pre-trading expenditure treated as incurred when trading begins).
 
 
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