Back in 2021, the Government announced in the 2021 budget that a review of the Research and Development tax reliefs, and the way that they operate, would be carried out. After much back and forth from the HMRC and key stakeholders in the industry, the draft legislation for these changes was released in July 2022. These changes will apply for accounting periods on or after April 2023. It is worth noting that the rules, currently as they are, will not be time-apportioning changes. This means that clients with a March/April/May year-end, for example, will be affected by the changes much sooner than your clients with a later year-end.
The draft legislation is aiming to tackle four key areas. These are:
Extending Qualifying Expenditure
Under the new rules, data and cloud computing costs will be allowable expenditures under S1125 CTA 2009. Additionally, the scope of R&D tax relief will be extended to include advancements in pure mathematics, this is a positive recognition of the need to incur these types of expenditures in R&D projects carried out by innovative companies. The extension of the scope of the R&D tax relief schemes is also welcome news within the STEM fields.
Refocusing the Reliefs Towards Innovation In the UK
HMRC will be restricting the R&D tax relief to only cover UK expenditure. These new rules will impact subcontractor costs, contribution to independent research and externally provided worker costs. Subcontractor costs and contributions to independent research will only be allowable if the R&D activities are carried out in the UK, or are qualifying overseas costs. Externally provided worker costs are only allowable if the worker is taxed under UK PAYE, or are qualifying overseas costs.
Companies will only be able to claim overseas costs where they can show that, due to certain conditions, they couldn’t pay someone in the UK to provide the work carried out, and it would be ‘wholly unreasonable’ to replicate the work in the UK. Allowable conditions include geographical and environmental conditions, as well as legal requirements. However, the cost and availability of workers will not be sufficient reasons to pay someone overseas.
Tackling Abuse and Improving Compliance
HMRC have announced a wide range of measures to help tackle the abuse of the R&D tax relief schemes and improve compliance with the rules. These measures are:
- All claims must be submitted digitally
- Additional details must be provided on the R&D being claimed for
- R&D agents must be disclosed on the return
- Claim must be signed off by a Senior Officer of the company
- Senior Officer to be disclosed on the tax return
- Pre-notification of the R&D claim must be made
There is still additional information to be released on the pre-notification requirement for companies making R&D claims, but there are some useful bits of information in the draft legislation. If a company has made an R&D claim within the three accounting periods before the year they are claiming for, a pre-notification isn’t required. Therefore, this will mainly impact new claimants. If a pre-notification is required, it must be made within six months after the claim period ends. HMRC will specify the information it expects to be within a pre-notification and how this should be made.
Addressing Anomalies and Unforeseen Consequences on Existing Legislation
Several amendments to previous legislation have also been announced to overcome issues highlighted in the existing rules, including:
- Allowing companies to make an RDEC claim where they have been found to have mistakenly claimed SME relief
- Confirming that expenditure must have been paid for within two years of the end of the accounting period
- Amending the time limit for claiming to two years from the end of the period of account to which they relate
- Amendments to the transitions rules for groups where a company moves from SME to large
- Amendments to the going concern rules where a transfer of trade occurs
- Amendments to the rules around HMRC recovering overpaid tax credits
The key points you should take away from the above are that it’s important that you’re discussing these changes with any clients who claim R&D tax reliefs, these clients should review how much they currently spend on overseas contractors and externally provided workers, and assess whether this should be brought into the UK. As the changes affect accounting periods after the 1st of April 2023, clients with a March/April/May year-end will be impacted sooner than others. Due to the pre-notification requirement, R&D discussions should be carried out as close to year-end as possible, or ideally in real-time. More information will be released either at the end of 2022 or the start of 2023.