UK: Scientific research associations tax regime

01 November 2014

1. Beneficial tax regime

In the UK, scientific research associations may qualify for exemption from UK tax if they meet various conditions.

A scientific research association ("SRA") is a company for UK tax purposes and is exempt from UK corporation tax in respect of: (i) trade profits; (ii) capital gains made on disposal of its assets; (iii) gifts of money which the SRA receives from companies; (iv) property rental income; and (v) qualifying income and non-trading gains on intellectual property ("IP").

The SRA would be required to self-assess their eligibility to exemption from UK tax by showing that it meets the conditions to be a SRA. This self-assessment will take place at the time the SRA will be required to submit its tax returns to the UK tax authorities.

Gifts of money by a company to a UK charity are eligible for gift aid relief, by way of a deduction from the company's taxable profits. For gift aid purposes, a SRA is treated as a UK charity. As such, gift aid relief should also apply to payments made by a company to a SRA.

2. Conditions

2.1 To qualify as a SRA, the body must meet three conditions: 

2.1.1 it must be an association;

2.1.2 its objects must be the undertaking of research and development ("R&D") which may lead to or facilitate an extension of any class or classes of trade; and

2.1.3 it must not be allowed to make any direct or indirect distribution in any manner or form of any of its profits to any of its members, subscribers or shareholders.
We consider each of these conditions in turn below.

2.2 Association

An association is: (i) a body formed by two or more persons for a common purpose; or (ii) a body corporate comprised of two or more members.

In practice, SRAs are usually companies limited by guarantee. For the purposes of this article, we have assumed the SRA will be a company limited by guarantee. It is quick and inexpensive to establish a company limited by guarantee, and as noted above, the association will be required to self-assess their eligibility as a SRA rather than wait to obtain prior approval from the UK tax authorities.

2.3 Object

The object of the SRA must be "the undertaking of R&D which may lead to or facilitate an extension of a class of trade". The SRA will be considered to satisfy the object condition if the following conditions are met:

2.3.1 the object is stated in the SRAs articles of association (and is the only object of the SRA);

2.3.2 at least 75% of the SRAs relevant income  (for example, revenue, chargeable gains, interest, gift aid payments and royalties) is used for activities that are treated as R&D, which may lead to or facilitate an extension of any class or classes of trade. The SRA is able to apply relevant income to a later accounting period, so long as there is a plan or programme of activities in place determining how such relevant income will be used.

2.3.3 the SRA must make arrangements for its R&D results to be made available  upon request and without charge, to all interested members, shareholders, subscribers and generally to the public, not later than one year after completion of the R&D.

2.3.4 any intellectual property ("IP") from any R&D undertaken is solely and beneficially owned by the SRA, or if the IP is made available by the SRA to another person (for example, by way of licence), the IP must also be made available by the SRA to members, subscribers and shareholders.

2.4 SRA payments

2.4.1 The SRA must not make any direct or indirect payments or transfers to any of its members of any of its income or property by way of dividend, gift, bonus or otherwise by way of profit.

2.4.2 Subject to any prohibition by the SRA's articles, the following payments to its members are permitted: (i) reasonable remuneration for goods, labour, power supplied or services rendered; (ii) reasonable interest for money lent; and (iii) reasonable rent for any premises.

3. Common structure

A SRA must be established for scientific research purposes only, and so where a SRA has mixed commercial and scientific research activities, it is usual for the SRA to split its activities in order for it to benefit from the UK tax exemptions. In practice, most SRAs are companies limited by guarantee. Where a SRA wishes to undertake commercial activities, it is common for the SRA to carry on the scientific research activities and for a wholly owned subsidiary company to carry on its commercial activities.

The SRA conditions specify that the R&D must be undertaken: (i) directly by the SRA using its own facilities; (ii) by a third party under the terms of a contract; or (iii) by a wholly owned subsidiary. In practice, it is common for the SRA to undertake very little direct R&D themselves, with the R&D usually being delegated to its subsidiary.

It is usual for a wholly owned subsidiary to gift aid their taxable profits to its parent, the SRA. Provided that the payments are not dividends, such payments should qualify for relief by reducing the subsidiary's UK corporation tax liability. As noted above and on the assumption that the SRA will use the subsidiary's gift aid payments solely for scientific research purposes, the SRA will not be subject to UK tax on receiving the gift aid payments.

All of the tax exemptions will only apply if the income and assets are applied solely to scientific research purposes. If a SRA does not incur its expenditure wholly for scientific research purposes, its tax exemptions may be restricted.

Should the conditions listed above not be met, it may be possible for the company to be set up as a UK charity and benefit from the various UK tax exemptions that are offered to UK charities.