What does section 1137 of the Corporation Tax Act 2009 do?

Section 1137 creates deemed accounting periods for companies incurring qualifying research and development expenditure when they are not yet within the charge to corporation tax. It treats the company as if it had been carrying on a trade from when it first began relevant R&D activities, providing the computational framework needed to claim pre-trading R&D relief.

Why are deemed accounting periods needed for pre-trading R&D expenditure?

Corporation tax liability is determined by reference to accounting periods. A company that has not started trading may have no accounting period at all. Since R&D relief provisions operate by reference to accounting periods, without deemed accounting periods a pre-trading company would be unable to perform the calculations needed to elect to create a tax loss from its qualifying R&D expenditure.

Which companies are most affected by section 1137 CTA 2009?

Section 1137 is most relevant to start-up companies and special purpose vehicles carrying out research and development before they have any trading income. Without this deeming provision, such companies would fall outside the computational machinery of the R&D relief rules and would be unable to benefit from creating a loss from their pre-trading R&D spend.

How do the deemed accounting periods under section 1137 work in practice?

The company is treated as having started a deemed trade when it first began relevant research and development activities. The deemed trade consists of those R&D activities. The company is then treated as having the accounting periods it would have had if that trade had actually been carried on, enabling it to calculate and claim R&D tax relief for pre-trading expenditure.

Corporation Tax Act 2009 section 1137

Accounting periods: company not within charge to corporation tax

Section 1137 creates deemed accounting periods for companies that incur qualifying research and development expenditure at a time when they are not yet within the charge to corporation tax.

This section applies where a company is not within the charge to corporation tax but has incurred qualifying Chapter 2 expenditure on research and development
The company is treated as having the accounting periods it would have had if it were carrying on a trade consisting of the relevant R&D activities
The deemed trade is treated as having started when the company first began carrying on relevant research and development
Without these deemed accounting periods, the company would be unable to perform the calculations needed to claim relief for pre-trading R&D expenditure

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