Commentary on Sections Overview Overview Section 1052: Qualifying expenditure on in-house direct R&D
2739.The section defines “qualifying expenditure on in-house direct research and development”. It is based on paragraph 3 of Schedule 20 to FA 2000.
2740.The broad aim of Schedule 20 to FA 2000 is to give relief to the company that incurs the expenditure on the research and development. Paragraph 3(3) of Schedule 20 to FA 2000 describes that as research and development directly undertaken “by the company” or “on its behalf”. A common set of conditions is used to decide whether expenditure on either type of research and development qualifies for relief.
2741.This Act uses the labels “in-house direct research and development” and “contracted out research and development” to describe the two types of research and development. It also rewrites the conditions that apply to each type of research and development separately. In part this is because the two types of activity are quite distinct and in part because the rules on sub-contractor payments apply only to contracted out research and development.
2742.The term “in-house direct research and development” is merely a label. It is not a condition of the relief that the research and development is incurred “in-house”. The condition that the research and development is directly undertaken by the company is rewritten in subsection (3). This requires that the research and development is undertaken “by the company itself”.
2743.The expression “in-house direct research and development” is used because it has a specific meaning in the Department for Business, Enterprise and Regulatory Reform guidelines on the meaning of research and development for tax purposes. See paragraph 27022702. But the definition of what constitutes “direct research and development” in paragraph 3 of Schedule 12 and paragraph 3 of Schedule 13 to FA 2002 is identical in all material aspects to that in paragraph 3 of Schedule 20 to FA 2000. So referring to “in-house direct research and development” in this section does not introduce a new condition into the rewrite of paragraph 3 of Schedule 20.
2744.The section does not reproduce the condition in paragraph 3(2) of Schedule 20 to FA 2000 that the expenditure is not of a capital nature. This condition is unnecessary because section 53 in Part 3 (trading income) already prohibits a deduction for capital expenditure.