Module 3: Advanced calculations

After this module you will be able to build a claim calculation that is structured the same way in every country, identify each point where a rule, a cap or an election changes the result, and record the decision taken at each point so it can be defended later by someone who did not prepare it.

What this module covers

A six step calculation structure: cost base, category rules, grants and funding, rate or method, limits, and the form of the benefit.
Subcontracted and overseas work: the percentage rules and the location rules, country by country.
A worked example with register rates for the United Kingdom and Ireland.

The calculation structure

Six steps, in order:

Cost base. Start from the boundary drawn in Module 2. Collect costs by category and reconcile each to the ledger.
Category rules. Apply the rule for each category: the staff proportion supported by time records, the percentage of contracted payments admitted, location conditions and connected party treatment.
Grants and funding. Reduce the base, or note that the scheme does not, for grants, subsidies, contract payments and other assistance.
Rate or method. Apply the rate, or where the scheme offers a choice of method, compute every option on the same base and choose with a written reason.
Limits. Apply expenditure caps, the thresholds that decide which rate applies, and caps on payable amounts.
Form of the benefit. Determine whether the result reduces tax, is paid out, is carried forward or is split across instalments.

Elections and method choices

A reviewer reads the file to see whether each election was taken deliberately. Compute each option on the same cost schedule, so the comparison is of methods, not data. Record the decision, the reason, the date and the approver, and whether the election is irrevocable for the year.

Subcontracted and overseas work

Country	Contracted work: amount admitted	Location rule
United States	Contract research: 65% of amounts paid for qualified research performed for you	Contract research expenses qualify only to the extent the research is conducted within the United States
United Kingdom	65 percent of payments to an unconnected subcontractor for contracted out R&D qualify; connected party payments are limited to the subcontractor's relevant expenditure	For accounting periods beginning on or after 1 April 2024, relief for contracted out R&D and externally provided workers is generally limited to work carried out in the UK
Ireland	Expenditure on R&D activities carried on by an unconnected person on behalf of the company qualifies up to the greater of 15 percent of the company's own qualifying expenditure and €100,000, provided the person does not also claim	Expenditure qualifies where the R&D activities are carried on within the State or another EEA state, and the expenditure is not relieved against tax in another territory
Canada	Only 80 percent of arm's length contract payments and third-party payments for SR&ED are included in qualified expenditures	Salary or wages for SR&ED carried on outside Canada by employees resident in Canada can be included to the extent they do not exceed 10 percent of the total salary or wages for SR&ED carried on in Canada in the year
Australia	Not eligible where the R&D activities are conducted to a significant extent for another entity, or where another entity bears the financial risk and effectively owns the results	R&D activities conducted outside Australia are eligible only where covered by a finding under section 28C of the Industry Research and Development Act 1986
New Zealand	Expenditure on a contractor performing R&D on behalf of the claimant is eligible for the claimant; the contractor cannot claim for the same activities	Eligible expenditure on R&D performed outside New Zealand is limited to 10 percent of the total eligible expenditure for the year
Singapore	For R&D outsourced to an R&D organisation in Singapore, IRAS treats a fixed portion of the fee (60 percent) as qualifying staff costs and consumables	Expenditure on R&D undertaken outside Singapore is deductible at 100 percent under section 14C where the R&D is related to the trade, and does not qualify for the additional deductions under section 14D

Grants, groups and cross-border questions

Grants and other funding. In the United Kingdom, for accounting periods beginning on or after 1 April 2024 there is no restriction for subsidised or grant-funded expenditure. In Ireland, expenditure met directly or indirectly by grant assistance or any other assistance from the State, an EU institution or any other state is not qualifying expenditure. In Canada, qualified expenditures are reduced by government assistance, non-government assistance and contract payments. In Singapore, R&D expenditure met by a government grant or subsidy is not deductible to the extent of the grant. In the United States research is funded if payment is not contingent on the success of the research, or if the taxpayer does not retain substantial rights, and only to the extent of the funding.

Groups. Members of a controlled group in the United States are treated as a single taxpayer for the credit, with the group credit allocated among members in proportion to each member's share of the eligible expenses. Associated Canadian-controlled private corporations must allocate a single expenditure limit among themselves. In Australia aggregated turnover includes the annual turnover of connected entities and affiliates, including foreign entities. In the United Kingdom the R&D intensity ratio is measured across the company and its connected companies.

Cross-border arrangements. Where a client has teams in two countries, three questions decide the calculation in each: where the work was physically performed, which entity bore the cost and bears the risk, and which entity owns the results.

Illustrative example

Illustrative example. Harbour Robotics Ltd, a hypothetical company, has eligible costs of 100,000 inside the boundary for its gripping algorithm project: 80,000 of staff costs and 20,000 paid to an unconnected subcontractor that performed testing in the same country, with no grant funding.

In the United Kingdom, 65 percent of the payment to the unconnected subcontractor qualifies, so 13,000 enters the base and the base is 93,000. The United Kingdom gives a 20% expenditure credit, 18,600, and the credit is taxable: notional tax at the main rate of 25% is deducted for a company paying the main rate, giving a net benefit of 15% of the base, 13,950. For a loss-making company notional tax is deducted at the small profits rate of 19%, giving a net benefit of 16.2%, 15,066.

In Ireland, the subcontractor payment qualifies up to the greater of 15 percent of the company's own qualifying expenditure, 12,000, and €100,000, so the whole 20,000 enters the base, provided the subcontractor is notified in writing and does not also claim. The base is 100,000 and the credit at the 30% rate for accounting periods beginning on or after 1 January 2024 is 30,000. The first instalment is the greater of €75,000 and 50 percent of the credit; where the credit does not exceed the threshold, the whole credit is paid as a single instalment, and the company elects whether it is offset against tax or repaid.

Across the seven countries

Country	Main election or method choice
United States	Choose a method: regular credit or alternative simplified credit, and decide whether to elect the reduced credit under section 280C(c).
United Kingdom	Most companies claim under the merged scheme; loss-making SMEs that are R&D intensive can claim ERIS instead, and an R&D intensive SME may elect to claim under the merged scheme rather than ERIS.
Ireland	The credit is paid in three annual instalments, as an offset against tax or a repayment. The company elects whether each instalment is offset or repaid.
Canada	The proxy method substitutes a prescribed proxy amount of 55 percent of the salary base for actual overheads. The election to use the proxy method is made on Form T661 and, once made, is irrevocable for that tax year.
Australia	Expenditure incurred to an associate can be notionally deducted only in the income year in which it is paid; if unpaid at year end the entity may claim it when paid, or deduct it under ordinary provisions and forgo the offset.
New Zealand	A person may apply for criteria and methodologies approval where eligible R&D expenditure for the income year is expected to exceed NZ$2 million; a significant performer may choose to apply for general approval of its activities instead.
Singapore	Cash payout: optional. 20% of up to S$100,000 of qualifying expenditure across EIS activities, so up to S$20,000 per Year of Assessment. An approved cash payout election is irrevocable and the converted expenditure cannot subsequently be claimed as a deduction.