(1) The Principal Act is amended -

(a) by substituting the following for section 766:

"Tax credit for research and development expenditure.

766.

(1)

(a) In this section -

'appropriate inspector' has the same meaning as in section 950;

'EEA Agreement' means the Agreement on the European Economic Area signed at Oporto on 2 May 1992 as adjusted by the Protocol signed at Brussels on 17 March 1993;

'expenditure on research and development', in relation to a company, means expenditure, other than expenditure on a building or structure, incurred by the company in the carrying on by it of research and development activities in a relevant Member State, being expenditure -

(i) which is allowable for the purposes of tax in the State as a deduction in computing the income from a trade (otherwise than by virtue of section 307) or is relieved under Part 8,

(ii) on machinery or plant which qualifies for any allowance under Part 9 or this Chapter, or

(iii) which qualifies for an allowance under section 764, but -

(I) expenditure on research and development shall not include a royalty or other sum paid by a company in respect of the user of an invention -