Finance Act 2002

Part 5 Supplementary provisions

Research and development expenditure of group companies

14 (1) Sub-paragraph (2) applies where—

(a) a company (“A”) incurs expenditure on making a payment to another company (“B”) in respect of activities contracted out by A to B,

(b) the expenditure incurred on the payment is research and development expenditure of A, and

(c) A and B are members of the same group at the time the payment is made.

(2) For the purposes of this Schedule —

(a) any of the activities contracted out by A to B and directly undertaken by B shall be treated (to the extent that it would not otherwise be the case) as research and development directly undertaken by B, and

(b) where B makes a payment to a third party (“C”) in respect of any of those activities that are contracted out by B to C and directly undertaken by C, those activities shall be treated (to the extent that it would not otherwise be the case) as research and development contracted out by B to C.

(3) For the purposes of this paragraph A and B are members of the same group if they are members of the same group of companies for the purposes of Chapter 4 of Part 10 of the Taxes Act 1988 (group relief).

Refunds of contributions to independent research and development etc

15 (1) This paragraph applies where a company receives a payment refunding the whole or any part of—

(a) any qualifying expenditure on sub-contracted research and development (see paragraph 5),

(b) any qualifying expenditure on contributions to independent research and development (see paragraph 6), or

(c) any expenditure which is qualifying sub-contracted R&D expenditure by virtue of paragraph 10,

in respect of which it obtains relief under this Schedule.

(2) The appropriate amount shall be treated as income of the company chargeable to tax under Case I of Schedule D for the accounting period in which the payment is made.

(3) Where, by virtue of paragraph 13(3) (profits of life assurance business chargeable to tax under Case VI of Schedule D), the relief obtained in respect of the contribution or expenditure concerned is a deduction in computing for tax purposes the profits of a part of the life assurance business of the company—

(a) sub-paragraph (2) does not apply, and

(b) the appropriate amount shall be treated as income referrable to that part which is chargeable to tax under Case VI of Schedule D for the accounting period in which the payment is made.

(4) For this purpose “the appropriate amount” means 25% of the payment.

Artificially inflated claims for deduction

16 (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 any relief to which a company is entitled under this Schedule.

(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 relief under this Schedule 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.