Annex 1: Minor Changes in the Law Change 79: Additional relief for research and development etc: meaning of “staffing costs”: sections 1123 and 1170
This change relates to the rewrite of paragraph 5(1) of Schedule 20 to FA 2000 (relief for expenditure on research and development) and paragraph 5(1) of Schedule 22 to FA 2001 (relief for expenditure on contaminated land). The effect of the change is that the definitions of “staffing costs” in sections 1123 and 1170 of this Act apply to money earnings and reimbursed expenses. (Note that “employee costs”, which is the expression used in Schedule 22 to FA 2001, is rewritten in section 1170 as “staffing costs” because the terms of the definition are identical to the terms used in defining “staffing costs” in section 1123.)
Schedule 20 to FA 2000 allows a small or medium-sized enterprise to claim additional relief for qualifying expenditure on research and development that is related to its trade. “Staffing costs” (as defined in paragraph 5 of Schedule 20 to FA 2000) is one of the categories of qualifying expenditure. The same definition is applied in Schedules 12 and 13 to FA 2002.
In relation to contaminated land, Schedule 22 to FA 2001 allows a company to claim additional relief for qualifying expenditure on the remediation of contaminated land used for the purposes of a trade or UK property business. “Employee costs” (as defined in paragraph 5 of Schedule 22) is one of the categories of qualifying expenditure.
When these Schedules were introduced, paragraph 5(1)(a) of each Schedule defined staffing costs and employee costs respectively as:
	the emoluments paid by the company to directors or employees of the company, including all salaries, wages, perquisites and profits whatsoever other than benefits in kind.
This language drew on the definition of “emoluments” in section 131 of ICTA. The only difference is that section 131 of ICTA omitted the words “other than benefits in kind”. Section 131 of ICTA identified the emoluments on which an employee was charged to income tax under the former head of charge, Schedule E.
Schedule E was rewritten in ITEPA. The charge on emoluments became part of the charge on employment income. The word “emoluments” is outdated and was replaced in ITEPA by “earnings”. The charge on employment income is made up of a number of different elements and the meaning of “earnings” in ITEPA goes wider than the definition of “emoluments” in section 131 of ICTA.
References to emoluments in legislation not being rewritten in ITEPA were amended by that Act so as to align them with the new definition of earnings. This included the references in paragraph 5(1)(a) of Schedule 20 to FA 2000 and paragraph 5(1)(a) of Schedule 22 to FA 2001. Paragraphs 245 and 258 of Schedule 6 to ITEPA substituted the following:
Paragraphs 245 and 258 of Schedule 6 to ITEPA also inserted the following definition of “earnings”:
	earnings or amounts treated as earnings which constitute employment income (see section 7(2)(a) or (b) of the Income Tax (Earnings and Pensions) Act 2003)
There were two problems with this amendment.
First, it was unnecessary. The definition in section 131 of ICTA applied in determining the tax charge on the employee receiving the payment. It identified an amount that constituted income in the hands of the employee. Over the years it has been the subject of a significant amount of judicial comment, particularly the meaning of “perquisites and profits whatsoever”.
The definitions in paragraph 5(1)(a) of Schedule 20 to FA 2000, and paragraph 5(1)(a) of Schedule 22 to FA 2001, apply to determine the amount of an expense in the hands of the company. Although the language is the same, the definitions were independent of the definition in section 131 of ICTA because that definition was from the standpoint of the employee. None of the supporting structure of Schedule E that influenced the interpretation of the definition applies to Schedule 20 to FA 2000 or Schedule 22 to FA 2001. There was no need to change the definition in Schedule 20 and Schedule 22 to mirror the rewrite of Schedule E.
Second, inadvertently it expanded the definition so that it included benefits in kind. These came in through the reference to amounts treated as earnings in section 7(2)(b) of ITEPA. The definition of those amounts in section 7(5)(b) of ITEPA includes payments under the benefits code.
This error was corrected in paragraph 7 of Schedule 17 to FA 2004. That Schedule made a number of minor amendments to, or connected with, ITEPA. The aim of the Schedule was to restore the pre-ITEPA position with minimal differences. It did this in paragraph 5(1) of Schedule 20 to FA 2000 and paragraph 5(1) of Schedule 22 to FA 2001 by reinstating the original definition.
The difficulty with the original definition is partly that words such as “emoluments” and “perquisites” are outdated and partly that aspects of the definition are not clear. It is not certain that terms defined to regulate the income tax position of an employee have or should have the same meaning where the same term is used to regulate the corporation tax position of an employer company. In particular it is not clear what the phrase “profits whatsoever” means when looked at from the position of the employer making the payment. It is not possible to pay an amount of profit. Profit is a concept that applies to the person who receives the payment.
The reference to emoluments in paragraph 5(1)(a) of Schedule 20 to FA 2000 is rewritten in section 1123. The reference to emoluments in paragraph 5(1)(a) of Schedule 22 to FA 2001 is rewritten in section 1170. The exclusion by the source legislation of benefits in kind limits the meaning to amounts paid in money.
Both sections 1123 and 1170 rewrite the reference to emoluments in two parts:
	earnings paid in money (subsection (2)); and
	reimbursed expenses (subsection (3)).
“Earnings” is not defined so it has its ordinary meaning. It covers salaries, wages, commissions, bonuses and tips. It covers such payments whether paid regularly or otherwise. This covers part of the rewrite of “perquisites and profits whatsoever”.
“Reimbursed expenses” covers the balance of the rewrite of “perquisites and profits whatsoever”. It applies to cash reimbursements of expenses but not to expenses reimbursed in a non-cash form such as car and fuel benefits. This follows from the exclusion by the source legislation of benefits in kind.
In sections 1123(2) and (3) and 1170(2) and (3), the phrase “because of … employment” is used instead of the ITEPA phrase “by reason of employment”. The intended effect is that interpretations developed in relation to ITEPA, which might not be appropriate in this corporation tax context, cannot simply be read across into this definition. The phrase takes its ordinary meaning. There must be a relevant payment, and on ordinary principles, that payment must have been made because of the fact of employment of that director or employee.
The requirement that the expenses are paid by the director or employee comes because paragraph 5(1)(a) of Schedule 20 to FA 2000 and paragraph 5(1)(a) of Schedule 22 to FA 2001 apply to “profits whatsoever”. There is no profit to the director or employee unless he or she has incurred a personal liability that is then relieved by the company. So it would not apply to expenditure incurred by the director or employee using a company credit card (a card linked to the company’s bank account) because the cost is borne by the company (the company is liable), not the director or employee.
This change modernises the language of the law without changing the meaning of the law. This change also clarifies the law on the basis of generally accepted practice. To that extent this change removes in principle the right of a taxpayer to assert that the generally accepted practice is unlawful.
This change is adverse to some taxpayers in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.