Forthcoming Changes to R&D Tax Relief: Our Thoughts
At the Spring Budget 2021 the government launched a review of the two R&D tax relief schemes. With this, came a consultation which ran until June 2021. The findings of the consultation have now been published and HMRC have outlined more details about the forthcoming changes. The changes are outlined here and in this article, our Directors offer some brief thoughts on what lies ahead for the relief.
The headline grabbing change relates to the decision to restrict additional relief for subcontracted R&D only where the activity is undertaken in the UK. Currently, even if the R&D work is subcontracted to an overseas entity/person, the cost still attracts additional relief afforded by the R&D tax relief regime. From April 2023 this will change and only UK based R&D work will qualify for the relief. However, YesTax Director, John Moxon, believes there are other forthcoming changes which are likely to have a bigger impact.
“The change to overseas expenditure seems to have grabbed the headlines, but this will only affect certain companies. There are other changes which will affect all companies, such as the requirement for a senior officer of the company to sign off the claim and to include details of any agent which has advised the company on compiling the claim. These are big changes and ones which may have major consequences”.
The requirement for a senior officer at the company to sign off any claim may have unintended impacts. Many claims are compiled by company employees who are not statutory directors, but who may, for example, have a detailed understanding of the R&D work being undertaken. An example of this may be a senior engineer (but non-director) who is the lead staff member on a particular R&D project. John Moxon commented “We need clarification on what HMRC are trying to achieve with this new rule. Are HMRC wanting the person most closely involved in compiling the claim to put their name to it? If so, it’s unlikely that staff members who are not directors will be willing to do this. Afterall, it’s not their responsibility to shoulder tax risk, it’s the directors and owners of the company who should pick up that tab. Alternatively, if HMRC are simply wanting a director of the firm to sign off the claim, I can’t really see how this is a departure from the current system, where a director the of company is required to sign off the CT600 which contains the claim. I look forward to clarification on this matter”
YesTax Director, Mark Wood, shared his thoughts on the requirement for a company to notify HMRC of any agent which advised on the compilation of the claim. “This is a very welcome change and one which we support. HMRC are increasingly aware of poor adviser conduct but it’s very difficult for them to identify cases where a known bad adviser has been involved. This new measure will introduce transparency into the system. We all know who the bad agents are and this will give HMRC visibility of the companies they are advising. We know of agents who give bad advice and then do not file an R&D report (which gives HMRC visibility of who has compiled the claim). This measure will force agents to notify HMRC of who they are acting for”.
The recent announcement from HMRC also suggested that providing details of the claim (both technical and financial) will become a statutory requirement. Currently, there is no statutory requirement for a company to provide any details of the claim, although HMRC’s guidance suggests providing certain details would be useful. Hayley Kemp, YesTax Director, welcomes this new requirement.
“It seems unusual that such a generous tax relief is afforded to certain companies without any statutory requirement to provide the details of the claim. We have to remember just how generous R&D tax relief is - and how open to abuse it has been. Introducing a statutory requirement to provide details of the claim is just one piece of the jigsaw when trying to reduce fraud and error in R&D tax claims. We have seen examples of claims involving several million pounds of expenditure with no substantiating evidence. This cannot be right and we welcome the introduction of rules which require companies to provide details of their claims”.
Many claimant companies will be pleased to learn that qualifying expenditure for both reliefs (SME and RDEC) will be expanded to include data and cloud computing costs. This is unsurprising as the matter was specifically referenced in the Spring 2021 consultation document. John Moxon welcomed the forthcoming changes but suggested that other areas of expenditure could be brought into the relief.
“The decision to allow costs relating to datasets and cloud computing is welcomed. We act for many companies involved in the development of software and many are exasperated by the fact that these costs are currently not allowable. At present, only software license costs are permitted but these costs are often dwarfed by expenditure on data and cloud computing. Widening the scope of IT related expenditure means the relief is better suited towards R&D in 2021. The legislation for R&D tax relief was drafted over 20 years ago so this is a welcome update to better reflect the reality of modern R&D operations”.
“However, HMRC shouldn’t stop there. I would like to see a mechanism for certain sectors to be granted relief on additional costs which are not normally permitted. For example, companies which develop technology to solve critical global issues such as climate change and transmissible diseases should be able to claim additional expenditure. It would be nice one day to advise a company developing technology to capture carbon that they can claim more costs than a company which develops a platform for online gambling can. I would be wholeheartedly in favour of an enhanced scheme for companies which serve the common good”.
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