- Libcus
- July 27, 2022
- 10:31 pm
Significant changes announced for R&D tax reliefs from April 2023
On the 20th July 2022, the UK government published draft legislation for the forthcoming Finance Bill 22/23. Included in the draft legislation are significant changes to Research and Development (R&D) tax reliefs which aim to:
Support modern research methods by extending qualifying expenditure to include data and cloud costs- More effectively capture the benefits of UK R&D relief by refocusing support towards R&D activity within the UK
- Target abuse and improve compliance by requiring claimants to submit advanced notification of their claim and the provision of additional information
- Make amends to address unintended consequences in the existing legislation
The draft legislation follows a review of the R&D tax relief scheme initially launched at Budget 2021, and whilst still at consultation stage, the changes are expected to apply to claims for accounting periods beginning on or after 1st April 2023.
Some of the proposed changes will affect businesses in a positive way, however for others it could significantly reduce the amount of R&D tax credit a company receives. The main changes are highlighted below.
Extending qualifying expenditure
To incentivise R&D using modern computational approaches, the government is extending the scope of qualifying expenditure to include the costs of datasets and of cloud computing, which includes storage and hosting.
To further support cutting edge R&D, the government will make changes to the definition of R&D for the tax reliefs, to remove the exclusion of pure mathematics.
Cloud computing and licence payments for datasets are considerable costs for businesses, and these changes will allow them to claim relief on a wider range of expenditure from 1st April 2023.
Changes to R&D tax credits for overseas activities
Currently, any overseas R&D costs recharged to a UK claimant company qualify for R&D tax relief. However, from 1st April 2023, R&D activity will have to be physically located in the UK for the costs to be included.
There will be some narrow exemptions where factors such as geography, environment, population or other conditions that are not present in the UK are required for research (for example, deep ocean research) and where there are regulatory or other legal requirements for certain activities to take place in specific territories (for example, clinical trials). Cost or workforce availability will not be acceptable reasons for exemption, and the associated expenditure will therefore be excluded from the claim.
The impact of this change will largely depend on the size of the claimants business and the amount of R&D taking place outside the UK.
Tackling abuse and improving compliance
HMRC estimates that error and fraud across both R&D tax relief schemes amounts to 3.6% of total relief cost (over £300m). There are also concerns over the increase in R&D advisers who are not members of professional bodies or have no background in tax.
To tackle abuse of the relief and improve compliance, the government will introduce the following new measures from April 2023:
- All claims will have to be made digitally (except from those companies exempt from the requirement to deliver a Company Tax Return online)
- Digital claims will require more details to substantiate the claims, by breaking down the costs across qualifying categories and providing a brief description of the R&D
- Each claim will have to be endorsed by a named senior officer of the company
- Companies will need to inform HMRC in advance that they plan to make a claim – they will need to do this, using a digital service, within 6 months of the end of the period to which the claim relates
- Claims will need to include details of any agent who has advised the company on compiling the claim
HMRC have already hired additional inspectors to deliver more robust and consistent reviews of submitted claims, which has recently resulted in increased investigations and significant delays to claim processing times. The new measures will ensure that the relief goes to only those who should receive it and in a timely manner.
What’s next?
The government has made the draft legislation available for technical consultation and the final contents of Finance Bill 22/23 will be subject to confirmation at Budget 2022.
In the meantime, if you are thinking of claiming R&D relief for the first time you should ensure that you appoint a certified R&D specialist, who understands the ins and outs of the changes and can advise on the best course of action on an individual claim basis. Working with a specialist who understands how to apply the new measures will ensure your claim is successful and accepted first time.
Both clients and prospective clients should prepare for the proposed changes to take effect from 1st April 2023, focusing in particular on the exclusions for overseas activities, the requirement for greater claim detail and the advanced notification of submissions.
For accountants, it is now more important than ever to ensure that your clients’ claims are fair, robust and compliant before submission. You will also need to be aware of the advanced claim notification measures proposed, and the requirement to submit confirmation digitally in accordance with the new timelines – a change which effectively artificially brings forward the deadline for making a claim. Working with a specialist can really help identify if your clients are working on an R&D project in the early stages, so they don’t miss out on the relief they are entitled to.
We will endeavour to provide the latest guidance to our clients, referrers and prospective companies seeking to claim R&D tax relief. We are also happy to answer any questions you may have on the changes.