With the recent passing of the aptly named L-Day (Legislation Day) for the upcoming Finance Bill, the UK Government has now published its proposed changes to the Research and Development (R&D) Tax Reliefs system, with updates for both the SME and RDEC schemes in tow. These come into effect for accounting periods beginning on or after 01 April 2023. In this blog, we highlight the main changes to look out for.
Cloud and Data Costs
After years of calls for HMRC to modernise qualifying software expenditure, the draft legislation brings the welcome news that data licences and cloud computing services costs will be claimable from April 2023. There will be no restrictions on the types of data and cloud costs that qualify, as long as they are incurred in carrying out direct qualifying activities.
Qualifying R&D activities: do the maths
The Government has recognised that more and more R&D being undertaken is underpinned by mathematics. Previously, mathematics was not considered to qualify as R&D for tax purposes. To support this work, the definition of R&D is being expanded to include ‘pure mathematics’ as a qualifying activity.
Refocusing Relief: work must be done in the UK
To ensure any ‘spill over’ benefits of R&D (such as improved skills in the local workforce) are retained within the UK, restrictions are being placed on overseas expenditure in the hope this will encourage companies to carry out more R&D in the UK.
To do this, relief will only be given for a subcontractor payment when R&D activity has been undertaken in the UK. Where the company is registered is irrelevant, only where the work actually takes place. HMRC have said that they will look at contracts drawn up between the two parties to quantify this – something to note for any future engagements with R&D subcontractors. In addition, Externally Provided Workers will have to be paid via UK payroll for the costs to be eligible.
These measures will apply to both SME and RDEC schemes and will apply to accounting periods beginning on or after 01 April 2023.
There will be some exceptions when this restriction will not apply where the R&D cannot be carried out in the UK, for example regulatory requirements that mean clinical trials have to take place in certain jurisdictions, or geographical and environmental reasons, such as where deep ocean research is necessary. There are no exemptions for connected companies.
Tackling Abuse and Improving Compliance
In a bid to tackle abuse of the relief, several measures are set to be implemented. The first change is that all R&D claims will have to be made digitally and they must break down the costs across qualifying categories and provide a description of the R&D work undertaken. In addition, each claim made must be endorsed by a senior officer of the company and details of any agent (e.g. us) who has assisted the company with compiling the R&D claim must be provided.
The most prominent change being introduced to the R&D claim process is the requirement for companies to pre-notify HMRC of their intention to make a claim. This will be a digital notification that needs to be submitted to HMRC within 6 months of the end of the period to which the claim relates. Companies that have claimed in one of the proceeding three periods will not be required to pre-notify, so this will only affect first time claimants or those that haven’t claimed for a number of years.
The new pre-notification requirement may hamper companies that are beginning their R&D development and have not realised they are eligible to claim more than 6 months after their year-end. Greater awareness of the relief and an emphasis on advance planning are needed.
In summary the above changes should not be of any concern to those that are carrying out genuine R&D, but it’s still important to seek advice to ensure that the company does not inadvertently fall into any pitfalls.
The inclusion of the need to pre-notify HMRC does bring some potential bumps in the road to companies that have not yet begun R&D, or those that intend to make two-year claims. Companies need to be on the ball or risk losing the ability to claim for certain periods.
The exclusion of overseas subcontractor work and externally provided worker costs may also affect the quantum of several R&D Tax claims but this will be negated if activities are relocated to the UK, as the bill intends. It may also be possible to negate the impact of this with operational changes where it is possible to relocate activities or individuals to the UK. It is vital however to be proactive and ensure the correct tax planning and strategy is in place.
If you have any queries regarding the changes described above, please contact email@example.com and our dedicated team of R&D experts will be happy to help.