Commentary on Sections Overview Overview Section 1077: Qualifying expenditure on in-house direct R&D
2808.This section defines “qualifying expenditure on in-house direct research and development”. It is based on paragraph 4 of Schedule 12 to FA 2002.
2809.“In-house direct research and development” is the term this Act uses to describe research and development that is undertaken directly by the company.
2810.The section does not reproduce the condition in paragraph 4(5) of Schedule 12 to FA 2002 that the expenditure is not of a capital nature. This is not necessary as section 53 in Part 3 (trading income) already prohibits a deduction for capital expenditure.
2811.Condition C in subsection (4) identifies the expenditure that qualifies if the research and development is contracted out to the company. It prevents more than one company claiming the relief and the benefit of the relief leaking into the income tax sector.
2812.If a large company commissions the research and development the company will not be able to claim relief under this Chapter. This is because that Chapter requires the company to carry out the research and development itself. So subsection (4) allows a large company to which the research and development is sub-contracted to claim the relief.
2813.If the research and development is contracted out by a small or medium-sized enterprise that company will be able to claim relief itself under Chapter 2 of this Part. The effect of subsection (4) is to prevent relief also being given to the sub-contractor large company.
2814.The relief given by this Part is restricted to corporation tax payers. Subsection (4) prevents a sub-contractor company getting relief if the work has been contracted out by a person, other than a large company, who could get a deduction for the payment in calculating its trade profits. This prevents the sub-contractor passing on some of the benefit of the relief to an income tax payer by charging lower prices.