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LY 5: Eligible research and development expenditure
or “What costs can be claimed for research and development tax credits”
You could also call this:

“Tax credits for money spent on research and development done by others”

You can claim a tax credit for money you spend on research and development (R&D) that you pay someone else to do for you. This is called contracted research and development expenditure.

To work out how much of this spending you can claim, you use a simple sum. You take the total amount you paid the contractor and subtract any part of their work that doesn’t count as eligible R&D spending.

The amount that doesn’t count as eligible R&D spending is any money the contractor spends that wouldn’t be allowed if you had done the R&D yourself. You can check what counts as eligible R&D spending in section LY 5(1).

If you paid someone overseas to do R&D for you, there are different rules. These are explained in section LY 7, and those rules are more important than the ones in this section.

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Next up: LY 7: Foreign research and development expenditure

or “Rules for including overseas research and development costs in tax credits”
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Part L Tax credits and other credits
Research and development tax credits

LY 6Contracted research and development expenditure

  1. This section applies for a person for the purposes of section LY 5(2)(a) if the person has an amount of expenditure or loss (contracted research and development expenditure) for a research and development contractor to perform research and development activities for them.

  2. For the purposes of section LY 5(2)(a), eligible research and development expenditure includes an amount of contracted research and development expenditure, described in subsection (1), to the extent of the amount calculated using the formula—

    contract amount − ineligible expenditure.

    Where:

    • In the formula,—

    • contract amount means the amount of consideration paid or payable by the person to a contractor to perform research and development activities:
      1. ineligible expenditure means the contractor’s expenditure or loss in relation to performing the research and development activity, to the extent to which the expenditure or loss is not eligible research and development expenditure under section LY 5(1), treating the contractor as the relevant person for the purposes of that section.

        1. If an amount of contracted research and development expenditure, described in subsection (1), is also foreign research and development expenditure, described in section LY 7(1), then section LY 7 overrides this section in relation to that amount.

        Notes
        • Section LY 6: inserted, on , by section 10 (and see section 3 for application) of the Taxation (Research and Development Tax Credits) Act 2019 (2019 No 15).