Corporation Tax Act 2009 section 1042K

Amount of notional tax deduction

Section 1042K determines how to calculate the notional tax deduction that may be applied at step 2 of the process for redeeming the value of an R&D expenditure credit.

• The notional tax deduction equals the excess (if any) of the amount remaining after step 1 over the initial expenditure credit minus a notional tax charge calculated on that credit.
• For non-ring-fence trades, the notional tax charge is computed using either the main corporation tax rate or the standard small profits rate, depending on whether the company already has profits taxed at the main rate irrespective of the expenditure credit.
• For ring fence trades (oil and gas extraction), the notional tax charge comprises both corporation tax at the applicable ring fence rate and the supplementary charge, reflecting the higher tax burden on ring fence profits.
• The initial amount of the expenditure credit used in this calculation excludes any amount added back under the PAYE and NIC compliance rules.