Question 3a i
Cinnabar Ltd requires advice on the corporation tax treatment of expenditure on research and development
Cinnabar Ltd:
– Is a UK resident trading company.
– Has one wholly-owned UK subsidiary, Lapis Ltd.
– Is a small enterprise for the purposes of research and development expenditure.
– Prepares accounts to 31 March each year.
– Expects to pay corporation tax at the main rate for all relevant accounting periods.
Research and development expenditure – year ended 31 March 2015:
– The expenditure on research and development activities was made up as follows:
| £ | |
|---|---|
| Computer hardware | 44,000 |
| Software and consumables | 18,000 |
| Staff costs | 136,000 |
| Rent | 30,000 |
228,000 |
– The staff costs include a fee of £10,000 paid to an external contractor, who was provided by an unconnected company.
– The remainder of the staff costs relates to Cinnabar Ltd’s employees, who are wholly engaged in research and development activities.
– The rent is an appropriate allocation of the rent payable for Cinnabar Ltd’s premises for the year.
Required:
(a) (i) Explain, with supporting calculations, the treatment for corporation tax purposes of the items included in Cinnabar Ltd’s research and development expenditure for the year ended 31 March 2015. (5 marks)