Finance Act 2024

5 After Chapter 1 of Part 13 insert—

“Chapter 1A R&D expenditure credit

Introductory

1042A Overview of Chapter

(1) This Chapter provides an entitlement to a credit (called an “R&D expenditure credit”) in respect of certain expenditure on research and development.

(2) Section 1042B and 1042C make the basic provision setting out what the entitlement is and how it is to be realised.

(3) Sections 1042D to 1042F describe the expenditure by reference to which the entitlement arises.

(4) Section 1042G sets the percentage of that expenditure that is translated into the credit.

(5) Sections 1042H to 1042N make provision about what happens when a company obtains the credit (in particular, about how the credit is to be accounted for and applied or paid).

(6) Section 1042O makes provision about how the expenditure credit operates in the context of a basic life assurance and general annuity business carried on by an insurance company.

(7) This Chapter has to be read with Chapter 8, which limits the entitlement given by this Chapter in various respects.

Entitlement and claims

1042B Entitlement to credit

(1) A company is entitled to an R&D expenditure credit for an accounting period if it meets conditions A, B and C in this section.

(2) Condition A is that the company carries on a trade in the period.

(3) Condition B is that the company incurs expenditure that is both—

(a) allowable as a deduction in calculating for corporation tax purposes the profits of the trade for the period, and

(b) qualifying Chapter 1A expenditure by virtue of section 1042D, 1042E or 1042F.

(4) Condition C is that the company is not an ineligible company (see section 1142).

(5) The amount of the credit is the relevant percentage (see section 1042G) of the expenditure that satisfies condition B.

1042C Claiming the credit

(1) To obtain an R&D expenditure credit the company must make a claim (see Part 9A of Schedule 18 to the FA 1998).

(2) A company may not make the claim (“the RDEC 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 RDEC claim within the claim notification period, or

(c) the accounting period in respect of which the RDEC 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.

(3) For the purposes of subsection (2)(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).

Qualifying expenditure

1042D Qualifying expenditure: in-house R&D

(1) Expenditure of a company is qualifying Chapter 1A 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) See sections 1124, 1126 to 1126B and 1132 for provision about when expenditure within subsection (3)(a), (b) or (c) is attributable to relevant research and development.

1042E Qualifying expenditure: payments for contracted out R&D

(1) Expenditure of a company is qualifying Chapter 1A 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.

1042F Qualifying expenditure: activity as contractor for irrelievable client

(1) Expenditure of a company is qualifying Chapter 1A 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) Condition C is that the expenditure would, but for the fact that the research and development is contracted out to the company, be qualifying Chapter 1A expenditure by virtue of section 1042D or 1042E.

Rate of credit

1042G Percentage of qualifying expenditure translated into credit

(1) The relevant percentage for the purposes of section 1042B(5) is—

(a) 49%, in the case of a ring fence trade within the meaning given by section 277 of CTA 2010, or

(b) 20%, in any other case.

(2) The Treasury may by regulations replace the percentage for the time being specified in subsection (1)(a) or (b) with a different percentage.

Treatment of credit: main provisions

1042H Expenditure credit to count as taxable receipt

If a company is entitled to, and claims, an R&D expenditure credit for an accounting period, it must bring the amount of the credit into account as a receipt in calculating for corporation tax purposes the profits for the period of the trade concerned.

1042I Redemption of value of expenditure credit

If a company is entitled to, and claims, an R&D expenditure credit for an accounting period, the credit is to be dealt with as follows.

• Step 1

  The amount of the credit is to be applied in discharging any liability of the company to pay corporation tax for the accounting period.

• Step 2

  If there is a notional tax deduction (see section 1042K), it is to be applied to any amount remaining after step 1.

• Step 3

  If the amount remaining after step 2 exceeds the cap by reference to the company’s PAYE and NIC liabilities for the accounting period (see section 1112B), the excess is to be deducted.

• Step 4

  Any amount remaining after step 3 is to be applied in discharging any liability of the company to pay corporation tax for any other accounting period.

• Step 5

  If the company is a member of a group, it may surrender the whole or part of any amount remaining after step 4 to any other member of the group (as to which see section 1042N).

• Step 6

  Any amount remaining after step 5 is to be applied in discharging any other liability of the company to pay a sum to the Commissioners for His Majesty’s Revenue and Customs—

  (a)

  under or by virtue of an enactment, or

  (b)

  under an agreement made in connection with any person’s liability to make a payment to the Commissioners under or by virtue of an enactment.

• Step 7

  Any amount remaining after step 6 is (subject to sections 1112F and 1112H) to be paid to the company by an officer of Revenue and Customs.

1042J Treatment of deduction to comply with PAYE and NIC limit

(1) This section applies if an amount is deducted under step 3 in section 1042I.

(2) The amount is to be added to the amount of R&D expenditure credit to which the company is entitled for its next accounting period (including where that amount would otherwise be nil).

Notional tax deduction

1042K Amount of notional tax deduction

(1) This section determines the amount of the notional tax deduction for the purposes of step 2 in section 1042I.

(2) The amount of the deduction is the amount (if any) by which the amount remaining after step 1 in section 1042I exceeds the amount produced by deducting the notional tax charge from the initial amount of the expenditure credit (that is, its amount before the application of that step).

(3) Subsections (4) and (5) apply if the trade concerned is not a ring fence trade.

(4) The notional tax charge is the amount of corporation tax that would be chargeable on the initial amount of the expenditure credit if it were an amount of profits for the accounting period on which corporation tax was chargeable at the applicable rate.

(5) The applicable rate is—

(a) the main rate, if the company has profits for the accounting period that—

(i) are chargeable to corporation tax at the main rate, and

(ii) would be so even if they did not include any amount brought into account under section 1042H;

(b) in any other case, the standard small profits rate.

(6) Subsections (7) and (8) apply if the trade concerned is a ring fence trade.

(7) The notional tax charge is the sum of—

(a) the amount of corporation tax that would be chargeable on the initial amount of the expenditure credit if it were an amount of ring fence profits for the accounting period on which corporation tax was chargeable at the applicable rate, and

(b) the amount of the supplementary charge that would be chargeable on the initial amount of the expenditure credit if it were an amount of adjusted ring fence profits for the accounting period (see Chapters 6 to 9 of Part 8 of CTA 2010).

(8) The applicable rate is—

(a) the main ring fence profits rate, if the company has profits for the accounting period that—

(i) are chargeable to corporation tax at the main ring fence profits rate, and

(ii) would be so even if they did not include any amount brought into account under section 1042H;

(b) in any other case, the small ring fence profits rate.

(9) For the purposes of this section, the initial amount of an expenditure credit is to be treated as excluding any amount added under section 1042J.

(10) In this section—

• “adjusted ring fence profits” has the meaning given by section 330(2) of CTA 2010;

• “main rate” means the rate referred to in section 3(1) of CTA 2010;

• “main ring fence profits rate” means the rate referred to in section 279A(1) of CTA 2010;

• “ring fence profits” has the meaning given by section 276 of CTA 2010;

• “ring fence trade” has the meaning given by section 277 of CTA 2010;

• “small ring fence profits rate” means the rate referred to in section 279A(3) of CTA 2010;

• “standard small profits rate” means the rate referred to in section 18A(1) of CTA 2010.

1042L Treatment of notional tax deduction

(1) This section applies if an amount is deducted under step 2 in section 1042I.

(2) If the company is a member of a group, it may, in respect of the accounting period in which the expenditure credit arises, surrender the whole or part of the deducted amount to any other member of the group (as to which see section 1042N).

(3) To the extent that the deducted amount is not surrendered under subsection (2), it is to be applied in discharging any liability of the company to pay corporation tax for any subsequent accounting period.

1042M Priority of discharge

(1) An amount within subsection (2) is to be applied as described in that subsection before any amount within subsection (3) is applied as described in that subsection.

(2) An amount is within this subsection if it is to be applied under—

(a) section 1042L(3), or

(b) section 1042N(3) as it applies in relation to an amount surrendered under section 1042L(2),

in discharging the liability of a company to pay corporation tax for an accounting period.

(3) An amount is within this subsection if it is to be (or would but for subsection (1) be) applied under—

(a) step 4 in section 1042I, or

(b) section 1042N(3) as it applies in relation to an amount surrendered under step 5 in section 1042I,

in discharging the same liability as an amount within subsection (2).

Intra-group surrenders

1042N Amounts surrendered to other group companies

(1) Subsection (3) applies if an amount of expenditure credit is surrendered by the qualifying company to another member of its group under step 5 in section 1042I or under section 1042L(2).

(2) For the purposes of that subsection—

(a) the accounting period in respect of which the surrender is made is “the surrender AP”;

(b) an accounting period of the other group member is an “overlapping AP” if it overlaps with the surrender AP to any extent.

(3) The surrendered amount is to be dealt with as follows.

• Step 1

  Select an overlapping AP.

• Step 2

  Calculate the proportion of the overlapping AP that overlaps with the surrender AP, and apply that proportion to the amount of corporation tax payable by the other group member for that overlapping AP.

• Step 3

  Calculate the proportion of the surrender AP that overlaps with the overlapping AP, and apply that proportion to the surrendered amount.

• Step 4

  The amount given by step 3 is to be applied in discharging the liability of the other group member to pay the corporation tax mentioned in step 2, up to the amount given by that step.

• Step 5

  Select another overlapping AP, if there is one, and repeat steps 2 to 4.

• Step 6

  If any of the surrendered amount remains after steps 2 to 4 have been taken in relation to each overlapping AP, the remainder is to be treated for the purposes of section 1042I or (as the case may be) section 1042L(2) as if it had not been surrendered as mentioned in subsection (1).

(4) A surrender to which subsection (3) applies is not to be—

(a) taken into account in determining, for corporation tax purposes, the profits or losses of the qualifying company or the other group member, or

(b) regarded for corporation tax purposes as the making of a distribution.

Basic life assurance and general annuity businesses

1042O Adaptation of entitlement for certain insurance businesses

(1) This section applies if—

(a) for an accounting period, an insurance company is charged to tax in respect of its basic life assurance and general annuity business in accordance with the I-E rules, and

(b) the calculation of the company’s charge to tax for the period in respect of that business does not involve the calculation of any BLAGAB trade profit or loss of the company.

(2) The reference in section 1042B(3)(a) to expenditure that is allowable as a deduction in calculating the profits of the trade for an accounting period is to be read as a reference to expenditure that would be so allowable if the company were to calculate its BLAGAB trade profit or loss for the period.

(3) The reference in section 1042H to calculating the profits of the trade is to be read as a reference to calculating the I-E profit of the basic life assurance and general annuity business carried on by the company.

(4) Any receipt to be brought into account by virtue of this section is to be treated for the purposes of section 92 of FA 2012 (certain BLAGAB trading receipts to count as deemed I-E receipts) as if it had been taken into account in calculating the company’s BLAGAB trade profit or loss for the period.

(5) In this section, “BLAGAB trade profit” and “BLAGAB trade loss” have the meanings given by section 136 of FA 2012.”