(1) This Chapter limits the entitlements given by Chapters 1A and 2. (2) Sections 1112B to 1112E provide for the amount of R&D expenditure credit or R&D tax credit payable to a company to be capped by reference to certain liabilities of the company in connection with PAYE and national insurance, except in certain cases. (3) Sections 1112F and 1112G provide that payment of an R&D expenditure credit, and relief under Chapter 2, are available only to companies that are going concerns. (4) Section 1112H provides that an R&D expenditure credit or R&D tax credit does not have to be paid if a tax enquiry into the company is open or the company has outstanding PAYE or national insurance liabilities. (5) Section 1112I provides for transactions aimed at obtaining or increasing an entitlement under Chapter 1A or 2 not to succeed in doing so. (6) Section 1112J contains provision about the amount of relief to which certain Northern Ireland companies are entitled under Chapter 2.

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1112B Cap by reference to PAYE and NIC liabilities

(1) This section determines, for the purposes of sections 1042I and 1058(1), the amount of the cap by reference to a company’s PAYE and NIC liabilities for an accounting period. But see section 1112E (which provides for there to be no cap in certain cases). (2) The amount of the cap is the sum of— (a) £20,000, and (b) the amount produced by multiplying by three (“the multiplier”) the amount of the company’s relevant PAYE and NIC liabilities for payment periods ending in the accounting period (see section 1112C). (3) If the accounting period is less than 12 months, the amount specified in subsection (2)(a) is to be proportionately reduced. (4) If the company claims relief under both Chapters 1A and 2 for the period, the amount of the cap for the purposes of section 1042I is to be reduced by the amount of any R&D tax credit obtained by the company under Chapter 2. (5) The Treasury may by regulations— (a) replace the amount for the time being specified in subsection (2)(a) with a different amount; (b) replace the multiplier for the time being specified in subsection (2)(b) with a different multiplier.

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1112C Calculation of relevant PAYE and NIC liabilities

(1) This section determines the amount of a company’s relevant PAYE and NIC liabilities for a payment period for the purposes of section 1112B. (2) The amount is to be calculated as follows. Step 1 Take the total amount of the company’s PAYE and NIC liabilities for the payment period (see section 1112D). Step 2 Add any amount produced by the application of subsection (4) or (6) to the company as company A. Step 3 Deduct any amount produced by the application of subsection (4) or (6) to the company as company B. (3) An amount is produced by subsection (4) where— (a) two companies (“company A” and “company B”) are connected, (b) company A incurs expenditure in the payment period on externally provided workers (see sections 1127 and 1128), and (c) company B incurs staffing costs in the payment period in providing any of those workers for company A. (4) The amount produced is the sum of the amounts given, in relation to each worker in respect of whom subsection (3)(c) is satisfied, by— X×YZ where— X is the amount of expenditure that— has been incurred on staffing costs by company B in providing the worker for company A, and forms part of the total amount of company B’s PAYE and NIC liabilities for the payment period (see section 1112D), Y is the amount of company A’s expenditure on the externally provided worker that has been taken into account in calculating the amount of company A’s qualifying expenditure for the payment period, and Z is the total amount of company A’s qualifying expenditure on the externally provided worker (see section 1127) for the payment period. (5) Subsection (6) produces an amount where— (a) two companies (“company A” and “company B”) are connected, (b) company A incurs qualifying contractor expenditure in the payment period, and (c) company B incurs staffing costs in the payment period in undertaking on behalf of company A any of the research and development to which that expenditure is attributable. (6) That amount is such amount of those staffing costs as forms part of the total amount of company B’s PAYE and NIC liabilities for the payment period (see section 1112D). (7) In this section as it applies for the purposes of section 1042I— “qualifying expenditure” (except in the expression “qualifying expenditure on the externally provided worker”) means expenditure that is qualifying Chapter 1A expenditure by virtue of section 1042D, 1042E or 1042F; “qualifying contractor expenditure” means expenditure that is qualifying Chapter 1A expenditure by virtue of— section 1042E, or section 1042F as it applies by reference to section 1042E. (8) In this section as it applies for the purposes of section 1058(1)— “qualifying expenditure” (except in the expression “qualifying expenditure on the externally provided worker”) means qualifying Chapter 2 expenditure (see section 1051); “qualifying contractor expenditure” means qualifying expenditure that is qualifying Chapter 2 expenditure by virtue of— section 1053, or section 1053A as it applies by reference to section 1053.

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1112D Total PAYE and NIC liabilities

(1) For the purposes of section 1112C, the total amount of a company’s PAYE and NIC liabilities for a payment period is the sum of amount A and amount B. (2) Amount A is the total amount of income tax for which the company is required to account to an officer of Revenue and Customs under PAYE regulations for the period. (3) In calculating amount A, any deduction the company is authorised to make in respect of child tax credit or working tax credit is to be disregarded. (4) Amount B is the total amount of Class 1 national insurance contributions for which the company is required to account to an officer of Revenue and Customs for the accounting period. (5) In calculating amount B, any deduction the company is authorised to make in respect of any of the following is to be disregarded— (a) statutory maternity pay, (b) statutory adoption pay, (c) statutory paternity pay, (d) statutory shared parental pay, (e) statutory parental bereavement pay; (f) child tax credit, or (g) working tax credit. (6) Subsection (7) applies if— (a) in determining under section 1112C the amount of a company’s relevant PAYE and NIC liabilities for a payment period, it is necessary to determine the total amount of another company’s PAYE and NIC liabilities for that period, and (b) that period falls within, but is shorter than, a payment period of that other company. (7) The amount produced by subsection (1) in its application to that other company is to be proportionately reduced.

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1112E Exception for companies creating or managing intellectual property

(1) There is no cap by reference to a company’s PAYE and NIC liabilities for an accounting period if the company meets conditions A and B. (2) A company meets condition A for an accounting period if, during the period, the company is engaged in— (a) taking, or preparing to take, steps in order that relevant intellectual property will be created by it, (b) creating relevant intellectual property, or (c) performing a significant amount of management activity in relation to relevant intellectual property it holds. (3) For the purposes of subsection (2)— (a) a company is only engaged in an activity mentioned in paragraph (a), (b) or (c) of subsection (2) if the activity is wholly or mainly undertaken by employees of the company; (b) intellectual property is “relevant” intellectual property in relation to a company if the whole or the greater part (in terms of value) of it is created by the company; (c) intellectual property is created by a company if it is created in circumstances in which the right to exploit it vests in the company (whether alone or jointly with others). (4) For the purposes of this section— “intellectual property” means— any patent, trade mark, registered design, copyright, design right or plant breeder’s right, any rights under the law of a country or territory outside the United Kingdom which correspond or are similar to those falling within paragraph (a), or any information or technique not protected by a right within paragraph (a) or (b) but having industrial, commercial or other economic value; “management activity”, in relation to intellectual property, means formulating plans and making decisions in relation to the development or exploitation of the intellectual property. (5) A company meets condition B for an accounting period if the amount (if any) given by subsection (6) does not exceed 15% of the company’s qualifying expenditure for the period. (6) The amount given by this subsection is the sum of the following incurred by the company in the period— (a) qualifying expenditure on externally provided workers (see section 1127), where the company, the staff provider and (if different) the staff controller (or staff controllers)— (i) are all connected, or (ii) have jointly elected (under section 1130) that section 1129 is to apply to them as if they were all connected; (b) qualifying contractor expenditure, where the company and the contractor— (i) are connected, or (ii) have jointly elected (under section 1135) that section 1134 is to apply to them as if they were connected. (7) In subsection (6)(b), “qualifying contractor expenditure” has whichever of the meanings given by 1112C(7) corresponds to the purpose for which this section is being applied. (8) The Treasury may by regulations replace the percentage for the time being specified in subsection (5) with a different percentage.

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1112F Restriction of credit and relief to companies that are going concerns

(1) Subsection (2) applies if a company makes a claim under section 1042C (claims for R&D expenditure credit) at a time when it is not a going concern. (2) No amount is to be paid to the company at step 7 in section 1042I as a result of the claim. (3) Subsection (2) ceases to apply (and the company accordingly becomes entitled to be paid) if the company becomes a going concern on or before the last day on which it would be entitled to amend the claim in accordance with paragraph 83E of Schedule 18 to FA 1998. (4) A company may not make— (a) a claim under section 1044 (R&D relief by way of additional deduction), (b) an election under section 1045 (R&D relief by way of deemed trading loss), or (c) a claim under section 1054 (R&D tax credit), at a time when it is not a going concern. (5) If a company ceases to be a going concern after making a claim under section 1054, it is treated as if it had not made the claim (and accordingly there is treated as having been no payment of R&D tax credit to carry interest under section 826 of ICTA). (6) Subsection (5) does not apply so far as the claim relates to an amount that was paid or applied before the company ceased to be a going concern.

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1112G Meaning of “going concern”

(1) For the purposes of section 1112F, a company is a going concern if— (a) its latest published accounts were prepared on a going concern basis, and (b) nothing in those accounts indicates that they were prepared on that basis only because of an entitlement or expected entitlement to a credit or relief under this Part. (2) But a company is not a going concern if it is in administration or liquidation. (3) For the purposes of this section, a company is in administration if— (a) it is in administration under Part 2 of the Insolvency Act 1986 or Part 3 of the Insolvency (Northern Ireland) Order 1989 (S.I. 1989/2405 (N.I. 19)), or (b) a corresponding situation under the law of a country or territory outside the United Kingdom exists in relation to the company. (4) For the purposes of this section, a company is in liquidation if— (a) it is in liquidation within the meaning of section 247 of that Act or Article 6 of that Order, or (b) a corresponding situation under the law of a country or territory outside the United Kingdom exists in relation to the company. (5) If— (a) a company transfers its trade and research and development to another company that is a member of the same group, and (b) only by reason of that transfer, the company’s accounts for the period of account in which the transfer took place are not prepared on a going concern basis, the accounts are to be treated for the purposes of this section as if they were prepared on a going concern basis. (6) Section 436(2) of the Companies Act 2006 (meaning of “publication” of documents) has effect for the purposes of this section.

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1112H No credit payable if certain tax matters outstanding

(1) This section applies in relation to an amount that a company would, but for this section, be entitled to be paid— (a) at step 7 in section 1042I (payment of R&D expenditure credit not applied for other purposes), or (b) under section 1054 (payment of R&D tax credit). (2) If the company’s tax return for the accounting period in question is enquired into by an officer of Revenue or Customs— (a) the amount does not have to be paid to the company, but (b) an officer of Revenue and Customs may make a payment on a provisional basis of such amount as the officer thinks fit. (3) If the company has outstanding PAYE or NIC liabilities for the accounting period in question, the amount does not have to be paid to the company. (4) For the purposes of subsection (3), a company has outstanding PAYE or NIC liabilities for an accounting period if it has not paid to an officer of Revenue and Customs any amount that it is required to pay— (a) under PAYE regulations, or (b) in respect of Class 1 national insurance contributions, for payment periods ending in the accounting period.

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1112I Transactions aimed at obtaining credit or relief to be disregarded

(1) To the extent that a transaction is attributable to arrangements entered into for a disqualifying purpose, it is to be disregarded in ascertaining a company’s entitlement to relief under this Part. (2) Arrangements are entered into for a disqualifying purpose if their main purpose, or one of their main purposes, is to enable a company to obtain relief under this Part— (a) to which it would not otherwise be entitled, or (b) of greater amount than that to which it would otherwise be entitled.

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1112J Chapter 2 relief for Northern Ireland companies

(1) This section applies for the purpose of determining the entitlement of a Northern Ireland company to relief under Chapter 2. (2) A Northern Ireland company is entitled to additional relief under Chapter 2 only to the extent that the additional relief would be exempted from notification under Article 108(3) of the TFEU by a de minimis aid regulation listed in paragraph 3.4 of Annex 5 to the Windsor Framework (as amended or replaced from time to time). (3) In subsection (2), “additional relief” means the difference between the value of the relief claimed by the company under Chapter 2 in respect of expenditure and the value of the relief that could have been obtained by the company under Chapter 1A in respect of that expenditure. (4) This section does not apply to a company in relation to an accounting period if the company— (a) has not, at any time during the accounting period, carried on a trade involving— (i) trade in goods, or (ii) the generation, transmission, distribution, supply, wholesale trade or cross-border exchange of electricity, and (b) has notified an officer of Revenue and Customs in writing that it wishes to rely on the exception in this subsection. (5) In this section— “Northern Ireland company” means a company whose registered office is in Northern Ireland; “TFEU” means the Treaty on the Functioning of the European Union as it has effect by virtue of Article 10 of the Windsor Framework; “Windsor Framework” means the part of the EU withdrawal agreement known as the Windsor Framework by virtue of Joint Declaration No. 1/2023 of 24th March 2023 made by the European Union and the United Kingdom in the Joint Committee established by the EU withdrawal agreement.

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1119 “Small or medium-sized enterprise”

(1) In this Part “small or medium-sized enterprise” means a micro, small or medium-sized enterprise as defined in Commission Recommendation (EC) No 2003/361, but subject to the qualifications in section 1120 (and see sections 1120A and 1120B). (2) The Treasury may by order amend this section or sections 1120 to 1120B to substitute a different definition of “small or medium-sized enterprise” for the purposes of this Part. (3) This section is subject to section 1081 (insurance companies to be treated as large companies for purposes of Chapter 2).

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1120 Qualifications to section 1119

(1) This section contains qualifications to the definition of small or medium-sized enterprise in section 1119. (2) The qualifications are— Qualification 1 In Article 2(1) of the Annex, the references to 250 persons, 50 million euros and 43 million euros are to be read as references to 500 persons, 100 million euros and 86 millions euros (respectively). Qualification 2 If each of conditions A to D is met, Article 4(2) of the Annex is to be disregarded in determining whether a company (“C”) is within the definition of small or medium-sized enterprise in section 1119 for an accounting period in which C exceeds the employee limit or the financial limits. (3) Condition A is that C is a micro, small or medium-sized enterprise as defined in the Recommendation (or would be if the Annex were read as set out in qualification 1), disregarding any partner enterprise or linked enterprise. (4) Condition B is that a partner enterprise or linked enterprise to which C is related exceeds the employee limit or both of the financial limits, disregarding the number of employees, the annual turnover and the annual balance sheet totals of C. (5) Condition C is that the number of employees, annual turnover or annual balance sheet total (as the case may be) of the partner enterprise or linked enterprise to which C is related has been taken into account in determining whether C exceeded the employee limit or the financial limits. (6) Condition D is that, taken alone, C satisfies the employee limit and at least one of the financial limits. (6A) This section is subject to sections 1120A and 1120B. (7) In this section and in sections 1120A and 1120B — (a) references to the Recommendation are to the Commission Recommendation mentioned in section 1119(1), (b) references to the Annex are to the Annex to the Recommendation, (c) references to the employee limit are to the limit on the number of employees contained in Article 2(1) of the Annex (read as set out in qualification 1), and (d) references to the financial limits are to the limits on the annual turnover and balance sheet totals contained in Article 2(1) of the Annex (read as set out in qualification 1).

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1120A Enterprise treated as an SME where related enterprise becomes large

(1) This section applies, in relation to an accounting period, where the following conditions are met. (2) The first condition is that, for the duration of the accounting period, an enterprise (“E”) is related to a partner enterprise or linked enterprise (“F”). (3) The second condition is that, at the start of the accounting period, both E and F are small or medium-sized enterprises. (4) The third condition is that, at the end of the accounting period, E is not a small or medium-sized enterprise by reason only that F has, during the accounting period, exceeded the employee limit or either of the financial limits. (5) Both E and F are to be treated as if they were small or medium-sized enterprises for the accounting period.

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1120B Enterprise treated as an SME where acquired by an SME

(1) This section applies, in relation to an accounting period, where the following conditions are met. (2) The first condition is that, at the start of the accounting period, an enterprise (“E”) was not a small or medium-sized enterprise by reason only that a partner enterprise or linked enterprise to which E was related exceeded the employee limit or either of the financial limits. (3) The second condition is that, during the accounting period, control of E was acquired by a company that, at the time of the acquisition, was a small or medium-sized enterprise. (4) E is to be treated as if it were a small or medium-sized enterprise for the accounting period. (5) In subsection (3) “control” has the same meaning as in section 1124 of CTA 2010.

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1121 “Larger SME”

References in this Part to a “larger SME” are to a company which is a small or medium-sized enterprise by virtue of qualification 1 in section 1120.

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1122 “Large company”

In this Part “large company” means a company that is not a small or medium-sized enterprise.

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1123 “Staffing costs”

(1) For the purposes of this Part the staffing costs of a company are amounts to which subsection (2), (3), (4), (5) or (7) applies. (2) This subsection applies to an amount paid by the company to a director or an employee of the company which— (a) is earnings consisting of money, and (b) is paid because of the director's or employee's employment. (3) This subsection applies to an amount paid by the company to a director or an employee of the company, other than an amount paid in respect of benefits in kind, if— (a) the amount is paid in respect of expenses paid by the director or employee, and (b) the amount is paid because of the director's or employee's employment. (4) This subsection applies to secondary Class 1 national insurance contributions paid by the company. (5) This subsection applies to compulsory contributions paid by the company in respect of benefits for directors or employees of the company under the social security legislation of an EEA State ... or Switzerland. (6) In subsection (5) “social security legislation” means legislation relating to any of the branches of social security listed in Article 3(1) of Regulation (EC) No. 883/2004 of the European Parliament and of the Council on the co-ordination of social security systems as it had effect in the UK immediately before IP completion day. (7) This subsection applies to contributions paid by the company to a pension fund operated for the benefit of directors or employees of the company. (8) In subsection (7) “pension fund” means a scheme, fund or other arrangement established and maintained (whether in the United Kingdom or elsewhere) for the purpose of providing pension benefits. For this purpose “scheme” includes a deed, agreement or series of agreements. (9) In subsection (8) “pension benefits” means pensions, retirement annuities, allowances, lump sums, gratuities or other superannuation benefits (with or without subsidiary benefits).

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1124 Staffing costs: attributable expenditure

(1) This section applies for the purposes of this Part to identify when staffing costs are attributable to relevant research and development. (2) The costs which are so attributable are those paid to, or in respect of, directors or employees who are directly and actively engaged in relevant research and development. (3) Subsection (4) applies if a director or employee is partly engaged directly and actively in relevant research and development. (4) The appropriate proportion of the staffing costs relating to the director or employee is treated as attributable to relevant research and development. (5) Subsection (6) applies if persons provide services, such as secretarial or administrative services, in support of activities carried on by others. (6) Those persons are not, as a result of providing those services, to be treated as themselves directly and actively engaged in those activities.

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1125 “Software , data licences, cloud computing services or consumable items”

(1) For the purposes of this Part expenditure on software , data licences, cloud computing services or consumable items means an amount paid by the company in respect of— (a) computer software, ... (aa) data licences, (ab) cloud computing services, or (b) consumable or transformable materials. (1A) For the purposes of subsection (1)(aa) a data licence is a licence to access and use a collection of digital data. (1B) For the purposes of subsection (1)(ab) cloud computing services include the provision of access to, and maintenance of, remote— (a) data storage and hardware facilities; (b) operating systems and software platforms. (2) For the purposes of subsection (1)(b) consumable or transformable materials include water, fuel and power.

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1126 Software , data licences, cloud computing services or consumable items: attributable expenditure

(1) This section applies for the purposes of this Part to identify when expenditure on software , data licences, cloud computing services or consumable items is attributable to relevant research and development. (2) Expenditure on software , data licences, cloud computing services or consumable items is so attributable if the software , data licences, cloud computing services or consumable items are employed directly in relevant research and development. (3) Subsection (4) applies if software , data licences, cloud computing services or consumable items are partly employed directly in relevant research and development. (4) The appropriate proportion of the expenditure on the software , data licences, cloud computing services or consumable items is treated as attributable to relevant research and development. (5) Subsection (6) applies if software , data licences, cloud computing services or consumable items are employed in the provision of services, such as secretarial or administrative services, in support of other activities. (6) The software , data licences, cloud computing services or consumable items are not, as a result of their employment in the provision of those services, to be treated as themselves directly employed in those activities. (7) This section is subject to sections 1126A and 1126B.

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1126ZA Attributable expenditure: special rules for data and cloud computing

(1) Expenditure on data licences or cloud computing services is not to be treated as attributable to relevant research and development if, in connection with the grant of a licence or the provision of a service, a relevant person obtains— (a) a right to sell data in respect of which the licence is granted or the service is provided (as the case may be); (b) a right to publish, share or otherwise communicate data in respect of which the licence is granted or the service is provided (as the case may be) to a third party, other than for the purposes of communications reasonably necessary for, or incidental to, the purposes of the relevant research and development. (2) Expenditure on data licences or cloud computing services is not to be treated as attributable to relevant research and development so far as it is attributable to a qualifying indirect activity. (3) In this section— “qualifying indirect activity” means an activity mentioned in paragraph 31 of the Guidelines on the Meaning of Research and Development for Tax Purposes issued on 7 March 2023 and as amended from time to time; “relevant person” has the meaning given in section 1126A(10).

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1126A Attributable expenditure: special rules for consumable items

(1) Expenditure on consumable items is not to be treated as attributable to relevant research and development if— (a) the relevant research and development relates to an item that is produced in the course of the research and development, (b) the consumable items form part of the item produced, (c) the item produced is transferred by a relevant person for consideration in money or money's worth, and (d) the transfer is made in the ordinary course of the relevant person's business. (2) Expenditure on consumable items is not to be treated as attributable to relevant research and development if— (a) the relevant research and development relates to a process of producing an item, (b) the consumable items form part of an item produced in the course of that research and development, (c) the item produced is transferred by a relevant person for consideration in money or money's worth, and (d) the transfer is made in the ordinary course of the relevant person's business. (3) If— (a) the item produced as described in subsection (1) or (2) may be divided, and (b) only a proportion (“the appropriate proportion”) of that item is transferred by a relevant person as described in subsection (1)(c) and (d) or (2)(c) and (d), the appropriate proportion of the expenditure on the consumable items is not to be treated as attributable to the relevant research and development. (4) If— (a) a number of items are produced in the course of the relevant research and development described in subsection (2), and (b) only a proportion (“the appropriate proportion”) of those items is transferred by a relevant person as described in subsection (2)(c) and (d), the appropriate proportion of the expenditure on the consumable items is not to be treated as attributable to the relevant research and development. (5) A reference in this section to producing an item includes a reference to preparing an item for transfer. (6) For the purposes of this section a consumable item forms part of an item produced if— (a) it is incorporated into the item produced, or (b) it is turned into, or it and other materials are turned into, the item produced or a part of the item produced. (7) A reference in this section to the transfer of an item is a reference to— (a) the transfer of ownership of an item to another person (whether by sale or otherwise), or (b) the transfer of possession of an item to another person (whether by letting on hire or otherwise), and a reference to the transfer of an item includes, where the item is incorporated into another item, the transfer of that other item. (8) For the purposes of this section the provision of information obtained in testing an item is not to be regarded as consideration for the transfer of that item. (9) For the purposes of this section a transfer of an item produced in the course of research and development is not to be regarded as a transfer in the ordinary course of business if the item being transferred is waste. (10) In this section— “item” includes any substance; “relevant person”, in relation to relevant research and development, means— the company that incurs the cost of the research and development, whether it is undertaken by itself or contracted out, the company to which the research and development is contracted out, whether it is undertaken by itself or contracted out, the person (other than a company) who contracts out the research and development to a company and incurs the cost of the research and development, the person (other than a company) to whom the research and development is contracted out, or a person who is connected to a company or person described in paragraph (a), (b), (c) or (d).

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1126B Attributable expenditure: further provision

(1) The Treasury may by regulations make provision for the purpose of identifying when expenditure on data licences, cloud computing services or consumable items is attributable to relevant research and development, including provision modifying the effect of section 1126 , 1126ZA or 1126A. (2) Regulations under this section may include provision about— (a) the circumstances in which expenditure on data licences, cloud computing services or consumable items employed directly in relevant research and development is, or is not, to be treated as attributable to that relevant research and development; (b) the circumstances in which data licences, cloud computing services or consumable items are, or are not, to be treated as employed directly in relevant research and development. (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) Regulations under this section may amend— (a) section 1126; (aa) section 1126ZA; (b) section 1126A; (c) any other provision of this Act, if that is appropriate in consequence of provision made under paragraph (a) or (b). (5) Regulations under this section may make provision that has effect in relation to expenditure incurred before the making of the regulations, provided that it does not increase any person's liability to tax.

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1127 “Qualifying expenditure on externally provided workers”

(1) For the purposes of this Part a company incurs expenditure on externally provided workers if— (a) it makes a payment (a “staff provision payment”) to another person (the “staff provider”), and (b) the payment is in respect of the supply to the company, by or through the staff provider, of the services of any externally provided workers. (2) The company's qualifying expenditure on externally provided workers is determined in accordance with section 1129 or 1131. (3) In sections 1128 to 1131 references to “staff provider” and “staff provision payment” are to be read in accordance with subsection (1).

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1128 “Externally provided worker”

(1) For the purposes of this Part a person is an “externally provided worker” in relation to a company if each of conditions A to G is met. (2) Condition A is that the worker is an individual. (3) Condition B is that the worker is not a director or employee of the company. (4) Condition C is that the worker personally provides, or is under an obligation personally to provide, services to the company. (5) Condition D is that the worker is subject to (or to the right of) supervision, direction or control by the company as to the manner in which those services are provided. (6) Condition E is that the worker's services are supplied to the company through a staff provider (whether or not the worker is a director or employee of the staff provider or any other person). (7) Condition F is that the worker provides, or is under an obligation to provide, those services personally to the company under the terms of a contract between the worker and a person other than the company (the “staff controller”). (8) Condition G is that the provision of those services does not constitute the carrying on of activities contracted out by the company. (9) In sections 1129 to 1132A references to “staff controller” are to be read in accordance with subsection (7).

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1129 Qualifying expenditure on externally provided workers: connected persons

(1) This section applies if— (a) a company makes a staff provision payment, (b) the company, the staff provider and (if different) the staff controller (or staff controllers) are all connected, and (c) in accordance with generally accepted accounting practice— (i) the whole of the staff provision payment has been brought into account in determining the staff provider's profit or loss for a relevant period, and (ii) all of the relevant expenditure of each staff controller has been brought into account in determining the staff controller's profit or loss for a relevant period. (2) The company's qualifying expenditure on externally provided workers is— (a) the entire staff provision payment, or (b) if less, an amount equal to the aggregate of the relevant expenditure of each staff controller. (3) “Relevant expenditure”, in relation to a staff controller, means expenditure that— (a) is incurred by the staff controller in providing for the company the externally provided workers to whom the staff provision payment relates, (b) is not of a capital nature, ... (c) is incurred on staffing costs or agency workers' remuneration, and (d) is attributable to qualifying earnings of externally provided workers. (4) “Relevant period”, in relation to a person, means a period— (a) for which accounts are drawn up for the person, and (b) that ends not more than 12 months after the end of the company's period of account in which the staff provision payment is, in accordance with generally accepted accounting practice, brought into account in determining the company's profit or loss. (4A) In subsection (2) the reference to the staff provision payment is to that payment before any deduction is made from the payment under— (a) section 61S of ITEPA 2003, (b) regulation 19 of the Social Security Contributions (Intermediaries) Regulations 2000, or (c) regulation 19 of the Social Security Contributions (Intermediaries) (Northern Ireland) Regulations 2000. (5) In section 1123 (meaning of “staffing costs”), which applies for the purpose of determining whether the expenditure of a staff controller meets the requirements of subsection (3)(c), references to a company are to be read as references to a staff controller. (6) “Agency workers' remuneration”, in the case of any person who is an externally provided worker in relation to the company, means remuneration that— (a) is receivable by the worker under or in consequence of the contract mentioned in section 1128(7), but (b) does not constitute employment income of the worker apart from Chapter 7 of Part 2 of ITEPA 2003 (application of provisions to agency workers). (7) Any apportionment of expenditure of the company or a staff controller necessary for the purposes of this section is to be made on a just and reasonable basis.

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