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Question 3b

Dent Ltd requires advice on the corporation tax treatment of its expenditure on research and development (R&D) activities

Dent Ltd:
– Will be incorporated and start trading on 1 July 2019.
– Will undertake a research project to develop an innovative new process related to its trade.
– Will be a small enterprise for the purposes of R&D expenditure.
– Will prepare its first set of accounts to 30 June 2020.
– Will make wholly taxable supplies for VAT purposes.

Dent Ltd – budgeted R&D expenditure for the year ending 30 June 2020:

Specialist equipment 110,000
Property costs 46,000
Consumables 12,000
Staff costs 185,000

– The above figures are all exclusive of VAT, where applicable.
– The property costs entirely comprise heat, light and water expenses.
– The staff costs include a fee of £25,000 to an agency (which is VAT registered) for the provision of an unconnected external contractor’s services for the year.
– The remainder of the staff costs wholly relate to amounts payable to, or on behalf of, Dent Ltd’s employees, including pension contributions totalling £14,000.
– The property costs, consumables and agency fees are incurred evenly throughout the year.

(b) Explain the corporation tax treatment of the research and development (R&D) expenditure of £353,000 to be incurred by Dent Ltd in the year ending 30 June 2020, and, on the assumption that Dent Ltd registers voluntarily for VAT with effect from 1 July 2019, calculate the amount of the deduction which will be available in respect of this R&D expenditure for corporation tax purposes. (6 marks)