ACCA ATX ^UK Syllabus A4. Corporation Tax - Research and development expenditure - Notes ^{1 / 5}

In order to encourage more spending on research and development expenditure

additional tax reliefs are given for qualifying research and development expenditure incurred by companies. 

A single new R&D expenditure credit (RDEC) scheme has replaced the two existing R&D schemes (i.e. the one for small or medium enterprises and the other for large companies).

This new RDEC scheme is available to all companies.

The RDEC scheme works by treating an amount equal to 20% of a company’s ‘qualifying R&D expenditure’ as:

1. An additional amount of taxable trading income; and

2. A tax credit, which reduces the company’s corporation tax liability.

For a company that has qualifying R&D expenditure of £100,000 and pays corporation tax at the main rate, the overall effect would be as follows.

The net corporation tax saving of £15,000 represents the provision of a 15% subsidy to the company for carrying out the R&D activity.

Where the available tax credit exceeds the company’s corporation tax liability, the remaining amount of credit can be:

• carried forward and offset against the company’s corporation tax liability of future accounting periods; or

• in the case of a group company, surrendered to another member of the group; or

• paid to the company.

There is a cap on the amount that can be used in these alternative ways. This cap is not examinable.

Qualifying R&D expenditure consists of revenue expenditure on a project that seeks to achieve an advance in science or technology that is relevant to the company's trade. 

It includes expenditure on the following:

• staffing costs in respect of staff directly involved in the R&D work, including NICs (class 1 employer contributions) and pension contributions but excluding taxable benefits

• software, data licences, and cloud computing services directly used in R&D

• materials, water, fuel and power for R&D

• externally provided workers (i.e. agency staff) for R&D

• qualifying payments to subcontractors who are carrying out the work on the company’s behalf

It should be noted that the cost of renting property is NOT qualifying expenditure for the purposes of the RDEC scheme.

Payments in respect of externally provided workers and subcontractors

Payments made to an UNCONNECTED person: the qualifying R&D expenditure is 65% of the expenditure incurred. 

Payments to a CONNECTED person: the 65% restriction does not apply. However, the qualifying R&D expenditure is restricted to the lower of:

• the payment made to the connected person, and

• the relevant expenditure incurred by the connected person.

Unconnected parties can choose to make a joint election to be treated as connected. This would remove the 65% restriction that would otherwise apply. 
The election would apply to all payments made under the same contract. 

Two companies are classed as connected if either:

• they are controlled by the same person, or

• one of them controls the other.