No. A charity cannot claim R&D tax relief, however much it spends and however clearly the work meets the definition of R&D. Section 1142 of the Corporation Tax Act 2009 makes a charity an ineligible company, alongside an institution of higher education, a scientific research association and a health service body, and the Treasury can add to that list by order. It is a test of what the body is, not of what it does. Two routes remain open around it. A charity’s non-charitable trading subsidiary is not itself a charity and is taxed like any other company, so it can claim on its own R&D if it meets the ordinary conditions. And where a charity contracts R&D out, the contractor can claim for the work — a rule written for exactly this situation.
Why the exclusion is absolute
The ineligible company rule bites before any question about the work arises. It is not a restriction on the type of expenditure, on how the project is funded, or on whether the research is charitable in purpose. A charity carrying out development that would qualify without argument in a commercial company still claims nothing, because it is on the list.
That places charities inside the wider entity test set out in who can claim R&D tax relief: relief runs through the corporation tax computation, and only companies within the charge to corporation tax, carrying on a trade the R&D relates to, get near it.
Note what the rule does not do: it disqualifies the claimant, not the people it deals with. A charity that funds work in a company, or buys development from one, does not make that company ineligible. What the charity’s own status does change is who holds the claim where it contracts R&D out, and that is dealt with below.
The trading subsidiary is a different company
Charity law limits what a charity can trade in, and the tax exemptions for charitable trading only go so far, which is why so many charities put non-charitable trading into a wholly owned subsidiary. HMRC’s guidance is unambiguous about that subsidiary’s status: a charity’s trading subsidiary company is not a charity, and companies owned by charities are liable to pay tax on trading profits in the same way as other non-charitable companies.
That answers the first condition. The subsidiary is a company within the charge to corporation tax, so section 1142 does not touch it, and it claims or fails on the ordinary tests — a trade in the period, expenditure allowable in computing the profits of that trade, going concern, the PAYE and NIC cap, claim notification where required, and the Additional Information Form.
One structural point deserves modelling rather than assuming. A trading subsidiary that donates its profits to its parent under the company Gift Aid scheme gets a deduction for those payments, and may be left with little or no corporation tax for a claim to reduce. That does not make the claim pointless: the merged scheme credit is taxable and above the line, and for a company with no tax to pay it works through the calculation steps towards cash rather than a smaller bill — see the merged R&D expenditure credit. Work the claim out before the Gift Aid payment is fixed, not after.
R&D a charity contracts out
For accounting periods beginning on or after 1 April 2024, the general rule is that the party who takes the decision to undertake or initiate the R&D is the one who claims. A charity cannot, so without more, relief on work it commissions would disappear.
The legislation deals with it. Section 1042F of the Corporation Tax Act 2009 — with section 1053A doing the same job for ERIS — allows a contractor to claim where the R&D is contracted out to it by an irrelievable client. Three conditions apply: the expenditure is attributable to relevant R&D contracted out to the company; every person contracting the R&D out is either an ineligible company or a person not acting in the course of a trade, profession or vocation within the charge to tax in relation to the contracting out; and the expenditure would have qualified under the in-house or contracted-out provisions but for the contracting out.
A charity is an ineligible company under section 1142, so a company doing R&D for a charity is in the frame — including a charity’s own trading subsidiary developing something the charity has commissioned. Who claims when work is contracted out is worked through in contracted-out R&D, worth reading before the contract is signed rather than after.
What still has to be established
Settling the entity question does not settle the claim. The work itself has to meet the definition of R&D — a project seeking an advance in science or technology through the resolution of scientific or technological uncertainty — set out in what your company needs to qualify.
Which scheme applies is separate again, and a charity-owned company should not answer it from headcount alone: the SME thresholds take account of linked and partner enterprises, so the ownership structure has to be tested rather than assumed. Which R&D scheme applies to your company covers those tests.
If you are looking at a charity group and want to know where a claim can sit, if anywhere, tell us the structure and we will give you a straight answer before work goes into it.
Sources
- Section 1142, Corporation Tax Act 2009 — the meaning of ineligible company: a charity, an institution of higher education, a scientific research association within section 469(1)(a) CTA 2010, and a health service body within the meaning of section 986 CTA 2010, with power for the Treasury to prescribe others.
- CIRD163000: ineligible companies — “Any of the following is an ineligible company: a charity; an institution of higher education such as a university; a scientific research organisation; a health service body”, under CTA09/S1142.
- Annex iv: trading and business activities — basic principles — “It’s important to remember that a charity’s trading subsidiary company is not a charity”; “Companies owned by charities are liable to pay tax on trading profits in the same way as other non-charitable companies”; and that the company can get tax relief for charitable payments to a charity under the company Gift Aid scheme.
- Section 1042F, Corporation Tax Act 2009 — qualifying expenditure on activity as contractor for an irrelievable client: Condition A, that the expenditure is attributable to relevant R&D contracted out to the company; Condition B, that each person contracting out the R&D is an ineligible company or not acting in the course of a trade, profession or vocation within the charge to tax; and Condition C, that the expenditure would qualify under section 1042D or 1042E but for the contracting out. In force for accounting periods beginning on or after 1 April 2024.
- CIRD161000: contracted out R&D overview — “The general rule is that only the party who takes the decision to undertake or initiate R&D will be able to claim”, and the exception for activity as contractor for an irrelievable client under CTA09/s1053A and s1042F, an irrelievable client being an ineligible company or any person not acting in the course of a trade, profession or vocation within the charge to tax in relation to the contracting out.
- CIRD111000: new RDEC overview — only companies with a trade chargeable to UK corporation tax can claim, and ineligible companies cannot claim.
This page describes the rules as they stood at the review date above, as general information rather than advice on your circumstances. For how that distinction works, see our terms; for an answer on your own facts, talk to us.