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

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:

– 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.

Required:
(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)

Your manager has forwarded an email to you from Ms Driver, the acting finance director of Set Ltd. 
Background  information from your manager and the email from Ms Driver are set out below.

Email from Ms Driver– dated 7 June 2018

Required: Provide the explanations requested in the email from Ms Driver. 
The following marks are available:

(d) Steam Ltd – Project Whistle.           (7 marks)

Luiza, the finance director of Damiana plc, requires advice on the corporation tax treatment of the company’s expenditure on research and development (R&D)

Damiana plc:
– Is a UK resident quoted trading company.

Damiana plc – R&D expenditure:
– Damiana plc is a large company for the purpose of tax relief for R&D expenditure.
– During the year ending 31 March 2018, Damiana plc will incur expenditure on qualifying R&D of £169,000.
– Damiana plc will have taxable total profits, before any deduction in respect of R&D expenditure, of £1,675,000 in the year ending 31 March 2018.

Required:
(a) Explain, with supporting calculations, the tax relief available for the research and development (R&D) expenditure incurred by Damiana plc in the year ending 31 March 2018, and the amount of corporation tax which will be saved as a result of claiming this relief. (5 marks)

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:

– 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)