R&D Tax Relief - Major Changes Forthcoming From April 2023
At Spring Budget 2021 the government launched a review of the two R&D tax relief schemes - the Research and Development Expenditure Credit (RDEC) and the small and medium enterprises (SME) R&D relief. The objectives of the review were to ensure that the UK remains a competitive location for cutting edge research, that the reliefs continue to be fit for purpose and that taxpayer money is effectively targeted. Alongside this, the government published a consultation, which ran from 3 March 2021 to 2 June 2021.
The findings of the consultation have now been published and HMRC have outlined more details about the forthcoming changes. We can separate the changes into three main categories. Note that all changes to the relief are expected to be implemented from April 2023.
Data and Cloud Computing Costs
At Autumn Budget 2021 the government confirmed that, following the earlier consultation on qualifying expenditure in July 2020, qualifying expenditure for both reliefs will be expanded to include data and cloud computing costs.
The following new categories of expenditure will be brought into scope:
Licence payments for datasets. Respondents to both the 2020 and 2021 consultations have told us that datasets are as vital an ingredient as any raw materials or labour inputs which may be employed in the process of R&D. Therefore, expenditure via licence payments on purchasing datasets which are used directly for R&D in a qualifying R&D project will qualify for relief. Staff costs incurred in processing datasets will also be eligible for the relief.
Cloud computing costs that can be attributed to computation, data processing and software. HMRC will allow businesses to claim relief for the cost of cloud computing services used directly for R&D. For example, costs which can be attributed to computation, data processing, analytics and software.
R&D Expenditure Incurred Overseas
Where companies subcontract R&D activity to a third party, they will in future only be able to claim relief for that expenditure where that third party performs the work within the UK. The rules for subcontracting will not otherwise change. This will apply to the SME scheme, and a similar principle will apply in RDEC, where subcontracting occurs and where a company claims for contributions it makes for independent R&D of a qualifying body.
Under both schemes, where companies incur expenditure on payments for externally provided workers (EPWs), they will only be able to claim relief on such expenditure where those workers are paid through a UK payroll.
Companies will still be able to claim R&D tax reliefs on the costs of software and consumables sourced overseas, as well as payments for clinical trials volunteers overseas and payments for data and cloud sourced overseas, as these are considered inputs to activity in the UK.
Of all the proposed changes, the new rules regarding overseas expenditure are likely to have the most significant impact on certain companies which claim R&D tax relief. It is important that claimant companies are aware of the forthcoming changes. If you or your client incurs significant overseas subcontracted R&D expenditure, a re-think of how R&D expenditure is structured may be required.
Abuse and Compliance
Concern over abuse and boundary-pushing involving the R&D tax reliefs has grown in recent years. Some advisers (many with no background in tax) take advantage of companies who are unfamiliar with claiming for R&D. This exposes claimant companies to significant tax risks.
A number of changes will be implemented from April 2023:
- all claims to the R&D reliefs – either for a deduction or a tax credit – will in future have to be made digitally (except from those companies exempt from the requirement to deliver a Company Tax Return online)
- these digital claims will in future require more detail – for example, on what expenditure the claim covers, the nature of the advance sought, the field of science or technology, the uncertainties overcome
- each claim will need 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
- claims will need to include details of any agent who has advised the company on compiling the claim
If you wish to discuss any of the proposed changes, please do not hesitate to contact us at firstname.lastname@example.org
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