Particular bodies: scientific research associations
Scientific research associations (SRAs) within the meaning of CTA10/S469 are companies for CT purposes. However, CTA10/S491 (3) lists a number of exemptions and applies them to a qualifying SRA as though it were a charitable company the whole income of which was applied to charitable purposes. TCGA92/S271 (6) (b) makes similar provision in relation to chargeable gains.
Pre 1 January 2008 rules
For accounting periods that began before 1 January 2008, an SRA had to make any claim for exemption to the HMRC Commissioners supported by a certificate of approval from the regulatory department (originally the Department for Innovation, Universities and Skills (DIUS, whose relevant responsibilities transferred to the Department for Buisness, Innovation and Skills and are now in Department for Education, DfEd).
1 January 2008 onwards rules
F(2)A05/S13 introduced changes which are effective in relation to accounting periods commencing on or after 1 January 2008. The main changes
- extend the scope of an SRA’s activities from scientific research to the undertaking of research and development
- remove the requirement for an SRA to seek approval under what is now CTA10/S469 Condiation A from the regulatory department, and
- bring SRAs wholly within the CTSA regime.
SRAs are now required to self-assess their eligibility to exemption. The Scientific Research Organisations Regulations 2007 SI2007/3426 set out the conditions to be met by SRAs in order to self-assess a claim to exemption from tax.
For accounting periods that begin on or after 1 January 2008 an SRA should file a company tax return and include a claim to exemption from tax with the completed return. The claim is made on a stand alone certificate which can be obtained from the Leicester R&D Unit (contact details below). The return and certificate should be sent to:
Local Compliance S0563
PO Box 3900
Telephone 03000 515236
Email address: Leicester.RandD@hmrc.gsi.gov.uk
Leicester R&D Unit deal with all corporation tax-related work in relation to SRAs, including clearance requests from potentially exempt organisations and general queries on SRA status. All relevant work received elsewhere in HMRC should be redirected to Leicester.
A Scientific Research Association is defined in Condition A of CTA10/S469 as an association which has as its object the undertaking of research and development which may lead to or facilitate an extension of any class or classes of trade. “Research and Development” has the same meaning as in CTA10/S1138.
The Regulations specify:
- what kind of body is an association for the purposes of Condition A
- the circumstances in which an SRA is deemed to have the correct object, and
- the circumstances in which the undertaking of research and development is deemed to be capable of leading to or facilitating an extension of a class of trade.
An association is deemed to be a body formed by the combination of two or more persons for a common purpose, or a body corporate composed of two or more members. In practice most SRAs are companies limited by guarantee. An SRA is precluded from distributing, directly or indirectly, any part of its profits to members, subscribers or shareholders apart from reasonable payment in respect of the supply of goods or services, interest or rent of premises.
An association is deemed to have the correct object if:
- Its constitutional document states that its object is the undertaking of research and development which may lead to or facilitate an extension of any class or classes of trade, and the stated object is its only object. Where this condition is not satisfied, it is deemed to be met if the association was approved by the regulatory department (see above) in respect of the immediately preceding accounting period, and the object stated in the constitutional document has not been changed.
- The “income spending condition” is met.
- Requirements relating to disseminating the results of research and development and to intellectual property are met.
The “income spending condition”
In an accounting period the association must apply, or intend to apply, at least 75 per cent of its ‘relevant income’ in the period to activities ‘that are treated as research and development which may lead to or facilitate an extension of any class or classes of trade.’ Where the association intends to apply an amount of ‘relevant income’ in a later accounting period, there must be a plan or programme of activities in place before the end of this initial accounting period. The amount must be applied to these planned or programmed activities before the fifth anniversary of the end of the accounting period in which the income arose.
Where the “income spending condition” is not met, the association is treated as ineligible for exemption in relation to any accounting period which falls within the calendar year that ends on the sixth anniversary of the last day of the accounting period in which the income arose.
‘Relevant income’ for this purpose has a wide definition. It is the gross amount of income for the accounting period but it does not include:
- any amount paid out in respect of pension deficit funding
- any chargeable gain arising from the sale or disposal of land and buildings to a wholly owned subsidiary
- FRS 102 transactions (FRS 17, for accounting periods ending before 1 January 2015).
As with many other employing organisations, an association may have significant liabilities arising from pension fund deficits. In the case of SRAs, these may relate to past or present staff directly employed by it or one of its subsidiaries. Such payments could have the effect of distorting an association’s spending profile and so they are left out of account for the purposes of the “income spending condition”. The sums must be paid to the trustees or managers of the pension scheme on the recommendation of an actuary or in compliance with the requirements of the Pension Regulator.
Relief is limited to the discharge of liabilities arising before the start of the association’s first accounting period on or after 1 January 2008, and which relate to pension beneficiaries that were employed on scientific research. This is defined for this purpose as being any activities in the fields of natural or applied science for the extension of knowledge, the purpose of which was to facilitate an extension of any class or classes of trade.
FRS 17 transactions are quite different from pension deficit funding although both relate to pension scheme obligations. FRS 17 breaks down for disclosure requirements the annual cost of the pension scheme into different areas of the profit and loss account. The gross current service cost is included before arriving at operating profit (i.e. ‘above the line’), and the interest cost and expected return on assets is netted off and shown in a separate category (i.e. ‘below the line’). The amount below the line can be positive or negative but is not treated as ‘relevant income’ for the purpose of these Regulations. For accounting periods beginning on or after 1 January 2015 Section 28 of FRS 102 applies but the measurement principles are broadly similar.
Requirements relating to disseminating the results of research and development and to intellectual property
These requirements determine whether the undertaking of research and development is deemed to be capable of leading to or facilitating an extension of a class of trade.
The research and development must be undertaken directly by the association using its own facilities; by a third party under contract or by a wholly owned subsidiary. The Regulations are framed widely enough to embrace work done by sub-subsidiary companies, and by partially owned or associated companies. SRAs often operate within a structure very similar to that adopted by charities which use trading subsidiaries to carry out their non-charitable trading activities. The tax exempt associations currently undertake very little direct research and development themselves; this is delegated to commercial subsidiaries that carry on a mix of activities, some of which are outside the scope of exemption. The subsidiaries may pay their profits to the parent SRA under the Gift Aid provisions of CTA10/PART6.
Arrangements for disseminating results
To be eligible for exemption from tax, the association must make arrangements for dissemination of any results before the end of the accounting period, and must ensure that these results are made available:
- upon request and without charge (subject to recovering the reasonable costs of publishing and distribution)
- to all interested members, shareholders and subscribers, or generally to the public, and
- not later than one year after completion of the research and development.
Where any member, shareholder or subscriber is connected with the association, it is not sufficient for the results to be available to interested members, shareholders and subscribers. The results must be made available generally to the public or to any interested person in the relevant class of trade.
Intellectual property requirements
The intellectual property requirements are that intellectual property from any research and development undertaken in an accounting period:-
- Must be solely and beneficially owned by the association for at least a year from the end of the accounting period.
- If the intellectual property is sold or otherwise made available to any person in that accounting period or within a year of its end, the intellectual property must also be made available to members, shareholders and subscribers.
- If the association cannot secure sole beneficial ownership on account of shared funding, it must secure in the accounting period a right to use or exploit the intellectual property for at least a year from the end of the accounting period.
- If the association cannot secure sole beneficial ownership because it has contracted research to a university which never releases the full intellectual property rights in work undertaken by staff or students using its facilities, it must secure sufficient rights to ensure that at least the dissemination requirements are fully met. The position is equivalent to that of shared ownership on account of shared funding, with the one exception that in these cases the association fully funds the project.
There is a breach of the dissemination of research or intellectual property requirements where:
- The arrangements for dissemination are altered or replaced, such that the requirements are not met, after the end of an accounting period in which exemption is claimed.
- Any results are disseminated other than in accordance with the arrangements.
- In relation to any intellectual property arising from the research and development, none of the allowable alternatives are met.
Where there is a breach of requirements, the association is deemed not to have satisfied the conditions for exemption in the period when the breach occurs (whether or not the intellectual property arose in an earlier period).
Interpretation of the Regulations
The Regulations should not normally have the result of restricting the future scope of the activities carried on by an SRA beyond what the regulatory department (see above) has accepted for accounting periods beginning before 1 January 2008. For subsequent periods, a reviewing officer should be prepared to consider an interpretation of the primary legislation accepted by the regulatory department as an aid to interpretation in any future cases in dispute.