-
Clause 67 and Schedule 19 introduce a new
statutory definition of ‘research and development’ (R&D),
which replaces ‘scientific research’ in ‘scientific
research allowance’ (the existing special allowance for R&D),
and transfer jurisdiction for appeals concerning R&D from
the Secretary of State for Trade and Industry to the tax Commissioners
and Courts. The new definition also applies to other tax reliefs
for R&D and the new R&D tax credits.
-
‘Scientific Research Allowances’ ("SRA")
are renamed ‘Research and Development Allowances’ ("R&DA").
Their scope is intended to be unchanged.
-
The new definition of R&D does not apply to
the procedures for the approval of scientific research associations
and certain research bodies by the Secretary of State for Trade
and Industry, which remain unchanged.
____________________
DETAILS OF THE CLAUSE AND SCHEDULE
Clause 67
-
Subsection (1) gives effect to Schedule
19. The schedule contains the new definition of "research
and development" (R&D) and related amendments.
-
Subsection (2) provides for the new definition
of R&D and related amendments to apply to 2000/01 and subsequent
years of assessment for income tax and capital gains and to accounting
periods ending on or after 1 April 2000 for corporation tax.
New Schedule 19
Part I: The New Definition
-
Paragraph 1 inserts new Section 837A into
the Income and Corporation Taxes Act 1988 ("ICTA 1988"),
which defines "research and development".
-
Section 837A(1) provides for subsections (2) to
(6) to apply to the provisions of the Tax Acts which apply the
new Section 837A.
-
Section 837A(2) defines R&D as activities
that are treated as R&D in accordance with normal accounting
practice. The effect of this rule is to import the definition
of R&D in Statement of Standard Accounting Practice 13 into
the statutory definition of R&D.
-
Section 837A(3) allows the Treasury to make regulations
to include activities that are outside the scope of the accounting
definition of R&D, or to exclude activities that would otherwise
fall within the accounting definition of R&D.
-
Section 837A(4) allows regulations made under
subsection (3) to make provision by reference to guidelines issued
by the Secretary of State. The rules in subsections (3) and (4)
allow guidelines issued by the Secretary of State for Trade and
Industry to clarify the meaning of R&D to be imported, with
the approval of Parliament to the issued guidelines, into the
statutory definition of R&D.
-
Section 837A(5) defines ‘normal accounting
practice’ for the purpose of subsection (2) as normal accounting
practice in relation to the accounts of companies incorporated
in a part of the United Kingdom. The effect of this rule is to
ensure that normal accounting practice has the same meaning as
UK GAAP (Generally Accepted Accounting Practice in the UK).
-
Section 837A(6) provides that ‘oil and gas
exploration and appraisal’ ("oil and gas E&A")
is not included within ‘research and development’ unless
expressly provided. The reason for this rule is that although
oil and gas E&A is not within the accounting definition of
R&D, it has been accepted as qualifying for SRA in the past.
This rule is included to allow oil and gas E&A to continue
to qualify for R&DA (the new name for SRA) but not for other
special tax reliefs for R&D (including the new R&D Tax
Credits introduced by Clause 66 and Schedules 19 and 20).
-
Paragraph (2) inserts new Section 837B
into the Income and Corporation Taxes Act, which defines oil and
gas E&A.
-
Section 837B(1) defines, for the Tax Acts, oil
and gas exploration and appraisal as activities carried out for
the purpose of searching for petroleum in any area, or ascertaining
the extent or characteristics of any petroleum-bearing area, or
the reserves of petroleum in such an area to determine if the
petroleum is suitable for commercial exploitation. This matches
the scope of oil E&A that qualifies for SRA at present.
-
Section 837B(2) defines "petroleum"
for these purposes as having the same meaning as in Section 1
of the Petroleum Act 1998.
Part II: Consequential Amendments
-
Paragraph (3) provides for amendments to
the Income and Corporation Taxes Act 1988.
-
Paragraph (4) substitutes in Section 495
(regional development grants) "research and development"
for "scientific research".
-
Paragraph (5)(1) makes changes to various
provisions consequential upon the replacement of the term "scientific
research" by "research and development". It inserts
new Sections 82A and 82B into the Income and Corporation Taxes
Act 1988 (ICTA 1988).
-
New Section 82A contains provisions that were
formerly in Part VII Capital Allowances Act 1990 ("CAA 1990")
which permit traders to deduct revenue expenditure incurred on
R&D in the course of the trade which would otherwise not be
allowable. The new rule applies the new definition of R&D
in place of the old definition of SR. It also ensures that jurisdiction
for appeals on the scope and meaning of R&D lies with the
Appeal Commissioners and the Courts rather than, as previously,
with the Secretary of State for Trade and Industry. The scope
and effect of these rules is otherwise unchanged.
-
New Section 82B contains the provisions that were
formerly in Part VII CAA 1990 which permit a trader to deduct
sums paid for R&D to Scientific Research Associations or approved
universities and other institutions. These provisions are unchanged.
The new statutory definition of R&D does not apply for this
purpose. The procedure for approval of these bodies continues
to be administered by the Secretary of State for Trade and Industry,
as before.
-
Paragraph (6) is a consequential amendment
to the rules for group relief.
Capital Allowances Act 1990
-
Paragraphs (7) to (9) make consequential
amendments to the Capital Allowances Act 1990 to substitute ‘research
and development’ for ‘scientific research’.
-
Paragraph (10) defines ‘research and
development’ for the purposes of the Capital Allowances Act
1990 as those activities defined as ‘research and development’
in new Section 837A ICTA 1988, together with those activities
defined as ‘oil and gas exploration and appraisal’ in
new Section 837B ICTA 1988. This rule ensures that oil and gas
E&A will continue to qualify for R&DA (the new name for
SRA) as before.
-
Paragraph (11) makes further consequential
amendments to Section 161 CAA 1990 resulting from the repeal of
Section 136 CAA 1990.
Taxation of Chargeable Gains Act
1992
-
Paragraph (12) provides for consequential
changes to Section 195 Taxation of Chargeable Gains Act 1992 to
substitute ‘research and development’ for ‘scientific
research’. ‘Research and development’ for these
purposes takes the same meaning as in Part VII Capital Allowances
Act 1990. This means that it comprises those activities defined
as ‘research and development’ in new Section 837A ICTA
1988, together with those activities defined as ‘oil and
gas exploration and appraisal’ in new Section 837B ICTA 1988.
______________________
BACKGROUND
-
Allowances for capital spending on scientific
research were introduced in 1945. Since 1962, businesses have
been able to write off immediately capital expenditure incurred
on scientific research, including expenditure on facilities for
the carrying out scientific research.
-
The definition of ‘scientific research’
in the statute was not intended to be exhaustive. It forms an
overarching definition within which the actual meaning and scope
of the relief is determined by administrative discretion. This
authority arises through the appeal mechanism, whereby appeals
under the existing rules are determined by the Secretary of State
for Trade and Industry, whose decision is final. This is unlike
other tax appeals, which are heard by the tax commissioners and
courts.
-
The changes in this clause follow a period of
consultation. In January 1999, the Inland Revenue issued a technical
note on "Research and Development: Definition and Appeals".
This sought comments on a new definition of R&D to underpin
a transfer of jurisdiction of appeals on R&D matters to the
tax commissioners and courts to bring them into line with other
tax appeals. The technical note also included draft guidelines
on the meaning of R&D.
-
The clause was developed through consultation.
The use of the accounting definition and the transfer of jurisdiction
were strongly supported by consultees. The contents of the proposed
guidelines have been warmly welcomed.
