Corporation Tax Act 2009 section 1065

Qualifying Chapter 3 expenditure

Section 1065 identifies which research and development expenditure qualifies for relief under Chapter 3 of Part 13, and includes rules to prevent duplicate claims and to stop the benefit of relief leaking to income tax payers.

• Expenditure qualifies for Chapter 3 relief when a small or medium-sized enterprise (SME) either carries out R&D itself or subcontracts it from certain other persons
• Where a large company contracts out R&D to an SME, the SME can claim relief under Chapter 3, because the large company cannot claim under Chapter 5 (which requires the company to do the R&D itself)
• Where one SME subcontracts R&D to another SME, only the commissioning SME can claim relief under Chapter 2 — the subcontractor SME is prevented from also claiming under Chapter 3
• A subcontractor company cannot claim Chapter 3 relief if the work was contracted out by a non-large-company person who could deduct the payment in calculating its own trade profits, preventing R&D relief benefits from being passed on to income tax payers through lower pricing