Annex 1: Minor Changes in the Law Change 78: Additional relief for research and development: R&D threshold: sections 1050, 1064, 1075 and 1097
This change makes a small adjustment to the calculation of the total qualifying R&D expenditure threshold where a company has an accounting period that is shorter than 12 months.
Schedule 20 to FA 2000 and Schedule 12 to FA 2002 provide relief for companies which have incurred qualifying expenditure on research and development. Schedule 13 to FA 2002 provides relief for companies which have incurred qualifying expenditure on vaccine-related research. These reliefs are rewritten in Chapters 2, 3, 4, 5 and 7 of Part 13 of this Act.
The source legislation in paragraph 1(1) of Schedule 20 to FA 2000, paragraphs 1(1) and 7(1) of Schedule 12 to FA 2002 and paragraph 1(1) of Schedule 13 to FA 2002 states that a company is entitled to relief for an accounting period if the company’s qualifying expenditure for that period is not less than ₤10,000 or, if the accounting period is less than 12 months, such amount as bears to ₤10,000 the same proportion as the accounting period bears to 12 months. While the effect of the source legislation is generally understood, it is not explicit how it should be applied to particular circumstances. The legislation requires that the short accounting period be compared arithmetically to a 12 month period (the “normal” length of an accounting period). But not all 12 month periods are the same. What is the correct comparative period of 12 months? What should happen when that 12 month comparative period includes an extra day because it is a leap year?
In the cases affected by this change, the use of an arithmetical formula in which the denominator is based on a standardised number of days in a year removes any uncertainty in this regard. The number of days in the actual accounting period is divided by 365 to obtain the relevant proportion to apply to the threshold amount in order to find the adjusted threshold. So there is no need to consider which is the correct comparison period of 12 months when more than one such period could be appropriate.
In a leap year, the source legislation lowers by £27 the £10,000 threshold in sections 1050, 1064, 1075 and 1097 of this Act. Dividing by 365 in all cases, when 366 days might have been the appropriate number for substitution into the denominator, gives a slightly higher R&D threshold for the purposes of these sections.
This change assists taxpayers because it provides certainty and clarity. But in limited circumstances it will raise slightly the qualification threshold, thereby denying relief where relief might otherwise have been available.
This change is adverse to some taxpayers in principle and in practice. But the numbers affected and the amounts involved are likely to be small.