Recent updates and forthcoming changes to the R&D landscape

On 30^th November 2021, the government published a report on the R&D tax relief regime. The report set out specific details proposing changes to the R&D tax relief rules. In summary, the report published in November 2021 includes a summary of the consultation responses and outlines next steps for the review. The government confirms that the review is ongoing. However, it will continue to consider reforming other aspects of the R&D activity regime.  

Proposed changes to the R&D activity regime from 1^st April 2023

Inclusion of data and cloud computing costs of R&D activity 

With effect from 1^st April 2023, the scope of qualifying expenditure enhances to include costs on data & cloud computing. To illustrate, this includes expenditure on licence payments for datasets and expenditure on cloud computing costs. Following on from this, those costs are attributable to computation, data processing and software. They treat all of which as qualifying expenditure for R&D tax relief purposes. 

They expect this extension of scope in respect of qualifying costs to be of great benefit to businesses that are using modern technology for their R&D projects. As such, this welcome announcement should benefit technology-driven fast growth businesses. 

Refocusing the reliefs towards innovation in the UK 

The announcement of two significant changes in the November 2021 report, relate to restructuring R&D activities to those carried out in the UK. These are as follows:

• Where companies subcontract R&D activity to a third party, the subcontractor costs will only be eligible if the third party carries out work in the UK; and

• Where companies incur expenditure on payments to externally provided workers, the costs will only be eligible where the workers are paid through UK payroll.

The restrictions to subcontractor and externally provided worker costs will have an impact on a significant number of companies. There may also be practical challenges for businesses to identify what work is in the UK, particularly in respect of work performed by third parties. 

Abuse and compliance

Concern over abuse and boundary-pushing involving R&D tax reliefs has grown in recent years. The report highlights these concerns, particularly by R&D advisors with limited tax experience who have been involved in submitting ‘dubious’ claims where qualifying R&D criteria has not been met. 

As part of the next stage of this strategy, HMRC will further increase the resource for R&D tax credit compliance, with the creation of a new cross-cutting team focused on abuse. 

The Government has also proposed that all claims from April 2023 will be subject to the following rules:

• Companies will need to notify HMRC in advance that they plan to make an R&D claim;
• All claims will have to be made digitally (except from those companies exempt from the requirement to deliver a Company Tax Return online);
• A requirement for documentation to provide a breakdown of expenditure and key details on the R&D activities undertaken, including the scientific and technological uncertainties and advances;
• All claims will have to be endorsed by a named senior officer of the company; and
• Claims will need to include details of any agent who has advised the company on compiling the claim.

Stronger compliance checks may give rise to concerns over the growing complexity of the R&D claims process. However, other R&D updates suggest that this process will be made fairer and more seamless. This measure is understandable and unlikely to significantly hinder UK businesses. 

Addressing anomalies in the claims process 

The Government intends to support businesses growing and transitioning from the SME scheme to the less generous large company RDEC rules, by providing that where an SME within a group becomes large, all companies in the group will retain SME status for one year afterwards. 

Further, large companies that have mistakenly claimed SME relief can now reapply for RDEC tax credit on the same R&D expenditure. 

The time limit to amend an R&D claim will extend to two years from the end of the period of account to which it relates. Previously, it was 12 months from the statutory filing. This will allow companies to benefit from having more time to make a claim.

Next steps

In conclusion, the Government is welcoming responses to the report, with a deadline of 8^th February 2022. They expect to publish draft legislation for the changes set out above in the summer of 2022. This will invite views from stakeholders detailing implementation of these measures. Consequently, they will include this legislation in Finance Bill 2022-23 and the changes will come into effect from April 2023.

How can ETC Tax help?

The R&D tax rules are complex and can be difficult to navigate. It is therefore important for businesses to seek specialist advice. ETC Tax supports accountancy firms in preparing and submitting R&D claims for their clients.

We are experts in the field and understand HMRC’s specific requirements. Allowing businesses to get the most out of their R&D tax benefits. If you would like to speak to a member of our team about how ETC can help, please do not hesitate to contact us.