MGETR70015 - Museums and Galleries Exhibition Tax Relief: calculation: qualifying expenditure and transactions with connected parties

An additional听deduction can only be claimed on core expenditure that is qualifying expenditure. Expenditure qualifies if it is part of the separate trade and is not excluded expenditure. Excluded expenditure is expenditure on research and development and expenditure that represents听connected party profit (unless the arm鈥檚 length exception applies).听
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Expenditure on research and development听

Expenditure that could qualify for any of the R&D tax reliefs is excluded expenditure for the purposes of Museums & Galleries Exhibition Tax Relief (MGETR). The R&D tax reliefs include R&D expenditure credits, SME tax credits, and the newer merged scheme and credits for R&D-intensive SMEs.听

For the purposes of this rule, it does not matter whether the production company actually makes听a claim to R&D relief in respect of the expenditure. As long as听the expenditure could听be subject to an R&D claim, i.e.听it meets the qualifying criteria of one of the R&D reliefs, it is excluded expenditure for the purposes of MGETR.听

Guidance on the R&D reliefs can be found at CIRD80000.听
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Connected party profit听

If a production company incurs expenditure on a transaction with a connected party, that expenditure is excluded up to the amount of the connected party profit, unless听the transaction is priced as if it was at arm鈥檚 length.听

Connected party profit exists where a payment has been made to a connected party (鈥淐鈥�) in exchange for supplying goods and/or services, and the payment exceeds the expenditure that has been incurred by C in making that supply.听

Example听

An exhibition production company (Company A) uses Company B for lighting design听services during its latest exhibition. Both companies are subsidiaries of the same parent company, so they are connected parties.听

Company B incurs expenditure of 拢40,000 in carrying out its services. It charges Company A 拢60,000. The connected party profit is therefore 拢20,000 鈥� the amount by which the payment by Company A exceeds the costs incurred by Company B.听
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鈥楥辞苍苍别肠迟别诲鈥�听

鈥楥辞苍苍别肠迟别诲鈥� has the meaning given by section 1122 of the Corporation Tax Act (CTA) 2010. Broadly:听

  1. A company is connected with听another company if:听

    • the same person has control of both, or a person (person A) has control of one and persons connected with person A, or person A and persons connected with person A, have control of the other; or听

    • a group of two or more persons has control of each company, and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person (person A) with whom person A is connected.听
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  2. A company is connected with听another person if that person (person A) has control of it or if person A and persons connected with Person A together have control of it.听
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  3. Any two or more persons acting together to secure or exercise control of a company are treated in relation to that company as connected with one another and with any person acting on the directions of any of them to secure or exercise control of the company.听
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  4. A person is connected with:听

    • an individual if that person is the individual鈥檚 spouse or civil partner, or is a relative, or the spouse or civil partner of a relative, of the individual or of the individual鈥檚 spouse or civil partner听

    • any person (person A) with whom person A is in partnership, and with the spouse or civil partner or relative of any individual with whom person A is in partnership听

It is also possible to be connected via settlements and trusts 鈥� see section 1122(6) CTA 2010.听
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At arm鈥檚 length听

A transaction is entered into as if it was听at arm鈥檚 length if it makes 鈥榯he arm鈥檚 length provision鈥�,听which has the same meaning as in Part 4 TIOPA 2010 (INTM412010). This essentially means听that the payment made as part of a transaction must be set as if the connected parties were unconnected. If the connected party were an independent third party, what would they have charged for the goods or services supplied?听

The payment that would be made as part of an arm鈥檚 length provision can include a mark-up or an element of connected party profit, but the company must be able to justify this amount as one that would be charged between independent parties.听

The easiest way for a company to justify an amount is to provide evidence of similar amounts paid in comparable transactions between independent parties.听

Example听

Company A is an exhibition production company and Company B is a company which builds custom exhibition displays. Company A and Company B are connected. Company B builds displays听for听both Company A and unconnected third parties.听

If the amount paid to commission a display听by Company A is at a similar rate to the amount paid by a third party for听a听comparable听commission (in complexity, work hours required and so on), and Company A can provide evidence of this, then any profit element to the transaction would be justified, and the expenditure would not be restricted.听

End of example听

A production company may also be able to justify a profit margin or mark-up by reference to an industry standard. For example, if there were a standard profit margin charged by most听storage听companies in the industry, a production company would be able to justify paying the same or a similar profit margin to a connected party for that service.听

A full transfer pricing analysis is useful evidence, but it is not a requirement.听

Although the arm鈥檚 length provision has the same meaning as in the transfer pricing legislation, Part 4 TIOPA 2010, companies claiming MGETR听which are not otherwise within the scope of the transfer pricing legislation do not have to meet its other requirements. For example, a small company which applies the arm鈥檚 length principle to its connected party transactions for the purposes of MGETR听will still fall within the exemption from transfer pricing for small and medium-sized enterprises in section 166 TIOPA 2010.听
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Reasonable amounts听

Different transfer pricing methods can give different arm鈥檚 length values. As long as听the method used is reasonable, the arm鈥檚 length exception applies听and no expenditure is excluded.听

It is possible that, as part of a transfer pricing enquiry, HMRC may impose a transfer pricing adjustment on a connected party transaction while also accepting that the original provision was charged at a reasonable value. If the adjustment covers expenditure on which the production company has claimed MGETR, the company should amend its claim to reflect the value agreed with HMRC. Assuming the new value is lower than the original, the company will only lose entitlement to credit on the difference between the two amounts, not the entire connected party profit.听

However, if HMRC makes a transfer pricing adjustment and does not accept that the original payment reflected the arm鈥檚 length provision, then the arm鈥檚 length exception is deemed听to no longer apply听and the connected party profit is excluded in full.听
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Series of transactions听

If a company pays a connected party for a supply using a series of transactions, the effect of the legislation is to look through the series of transactions to the original supplier, and听use the original supplier鈥檚 cost to calculate connected party profit.听

For example, exhibition production Company A hires set up crew from a subsidiary, Company B. Company B charges Company A 拢100,000. Company B does not employ the crew directly, but hires them from its own subsidiary, Company C. Company C charges Company B 拢80,000. It costs Company C 拢60,000 to supply the crew, in wages and other expenses.听

The connected party profit is 拢40,000: the difference between the 拢100,000 Company A paid and the 拢60,000 cost to the original supplier, Company C. The amount paid by Company B is ignored.听

This rule applies no matter how long the series of transactions is.听

It also applies even if some of the parties in the sequence are unconnected, provided the company claiming relief is connected to at least one party in the series and each transaction in the series forms part of the same scheme or arrangement.听

For example, in the scenario above, the rule would still apply if:听

  • Company A was connected to Company B but not Company C听

  • Company A was connected to Company C but not Company B听

The arm鈥檚 length exception only applies to a series of transactions if the value of each individual transaction in the series is set as if the parties involved were at arm鈥檚 length.听
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Amount of excluded expenditure if arm鈥檚 length exception does not apply听

If the arm鈥檚 length exception does not apply, only the connected party profit amount is excluded expenditure, not the whole amount of the transaction.听

Consider the earlier example about听lighting design听services. Company A paid Company B 拢60,000, of which 拢20,000 was connected party profit. Assuming the 拢60,000 incurred by Company A was not an arm鈥檚 length price, the 拢20,000 connected party profit is excluded expenditure which is ineligible for relief. However, the remaining 拢40,000 is not excluded expenditure and is eligible for relief (assuming it meets the other qualifying criteria).听
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Disclosure听

Expenditure on connected party transactions is only allowable as qualifying expenditure if the transactions are disclosed听to HMRC. The disclosure must be made in the additional听information form (MGETR20030) covering the period in which the expenditure has been brought into account as a debit.听

If a transaction is not disclosed, expenditure incurred on that transaction will not count towards an expenditure credit.听

Using the additional听information form, companies must:听

  • declare whether their claim includes any expenditure on transactions with connected parties, i.e. is any amount paid or owed to a connected party included in qualifying expenditure for the period,听

  • provide the number of connected parties it has transacted with in transactions included in the claim, and听

  • provide the combined value of those transactions.听

Companies must also upload a document containing听details of all connected party transactions included in their claim. Details must include:听

  • the name of the connected party听

  • the date of the transaction听

  • the value of the transaction, as included in the claim (so either the arm鈥檚 length cost or the cost to the supplier)听

  • a description of the goods and/or services provided听

There is more detail about the requirements in Chapter 2 of this manual.听