Finance Act 2024

6(1)Chapter 2 of Part 13 (relief for SMEs on the cost of R&D) is amended as follows.U.K.

(2)For the heading substitute “Relief for loss-making, R&D-intensive SMEs”.

(3)For section 1043 (overview of Chapter) substitute—

“1043Overview 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.”

(4)In section 1044 (additional deduction for trading companies)—

(a)in subsection (1), for “D” substitute “F”;

(b)after subsection (2) insert—

“(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.”;

(c)after subsection (5) insert—

“(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).”;

(d)in subsection (6)—

(i)at the end of the first sentence insert “(see Part 9A of Schedule 18 to the FA 1998, and also sections 1045A and 1112F)”;

(ii)omit the second sentence;

(e)in subsection (7), at the end insert—

“The deduction is, in particular, additional to any given under section 87.”;

(f)omit subsection (9).

(5)In section 1045 (deemed trading loss for non-trading companies)—

(a)in subsection (1), for “conditions A and C” substitute “each of conditions A to D”.

(b)after subsection (2) insert—

“(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.”;

(c)after subsection (4) insert—

“(4A)Condition D is that the company is not an ineligible company (see section 1142).”;

(d)in subsection (5)—

(i)at the end of the first sentence insert “(see section 1047, and also section 1112F)”;

(ii)omit the second sentence;

(e)omit subsection (9).

(6)After section 1045 insert—

“1045ZAR&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)it forms part of the company’s total relevant expenditure for the period, or would do but for subsection (6)(a), and

(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.”

(7)Omit section 1046 (relief only available to going concerns).

(8)In section 1051 (meaning of “qualifying Chapter 2 expenditure”), for the words from “means” to the end substitute “is such of its expenditure as is qualifying Chapter 2 expenditure by virtue of section 1052, 1053 or 1053A.”

(9)For sections 1052 and 1053 (categories of qualifying Chapter 2 expenditure) substitute—

“1052Qualifying 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)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.

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)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 2 expenditure by virtue of section 1052 or 1053.”

(10)In section 1054 (entitlement to R&D tax credit)—

(a)in subsection (2)—

(i)at the end of the first sentence insert “(see Part 9A of Schedule 18 to the FA 1998, and also sections 1054A and 1112F)”;

(ii)omit the second sentence;

(b)in subsection (4), for “1060” substitute “1112H”;

(c)omit subsection (5).

(11)Omit section 1057 (R&D tax credit only available to going concerns).

(12)In section 1058 (amount of R&D tax credit)—

(a)in subsection (1)—

(i)in paragraph (a), for “10%” substitute “14.5%”;

(ii)for paragraph (aa) substitute—

“(aa)the amount of the cap by reference to the company’s PAYE and NIC liabilities for the accounting period (see section 1112B).”;

(b)omit subsections (1A) to (1C);

(c)in subsection (2), omit paragraphs (b) and (c);

(d)omit subsection (3).

(13)Omit sections 1058A to 1058D (provision in relation to PAYE and NIC liabilities).

(14)In section 1060 (payment of R&D tax credit)—

(a)for the heading substitute “Use of credit to pay corporation tax”;

(b)omit subsections (4) to (7).

(15)After section 1062 insert—

“1062AInsurance 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.”