The UK government has shifted focus towards research and development from the past few years due to its substantial contribution to the UK economy. To motivate businesses to advance research and development, the UK government initiated HMRC R and D tax credit scheme. The number of companies claiming HMRC R and D tax credits has significantly increased in the past few years. This scheme allows eligible businesses to get up to 33% of their eligible expenditure back. 2021 witnessed many changes such as Brexit and pandemic, which affected all business sectors. The R and D tax credits scheme has been an excellent chance for businesses to streamline operations. HMRC altered its approach and introduced a few changes in HMRC R and D tax credits in 2021.
Changes Made In HMRC R and D Tax Credits In 2021
Upsurge In HMRC Enquiries
There has been an increase in the number of R&D claims in the last few years, along with an increase in the number of fraudulent claims. To deal with such issues of fraudulent claims, HMRC has increased the number of enquiries for R&D tax relief claims. In addition, HMRC demands all the claimants to provide exact information regarding their R&D projects according to HMRC’s guidelines regarding R and D tax credit claims.
HMRC introduced PAYE Cap to control fraudulent claims. This PAYE Cap came to effect on April 1, 2021, to limit the payable HMRC R and D tax credits.
Fundamental Changes Expected In HMRC R and D Tax Credits In 2022
HMRC recently released changes expected in R&D tax relief in 2022, keeping the focus of the scheme the same as before i.e.
- To encourage innovation in the UK.
- To keep the UK as a competitive market for research and development
- To ensure the amount of tax is effectively used
The forthcoming modifications announced by the UK government to mitigate issues and flaws with the existing HMRC R and D tax credit scheme and to extend qualifying costs are:
- Expansion in qualifying cost by inclusion data and cloud expenditure
- Reorient R&D tax relief towards innovation in the UK
- Changes in approach to target abuse and for improvement of compliance
1. Addition of data and cloud expenditure in qualifying costs
HMRC has added the category of data and cloud computing in eligible costs for HMRC R and D tax credit claims. This category will inculcate the cost of database and software licenses and cloud computing expenditures. In short, all the computation and data-processing costs directly linked with R&D projects will be eligible for R&D claims. This addition in R&D tax relief will come to effect from April 2023 and will prove highly beneficial for businesses working on research and development projects that include data analysis and processing.
HMRC introduced PAYE Cap to control fraudulent claims. This PAYE Cap came to effect on April 1, 2021, to limit the payable HMRC R and D tax credits.
2. Reorientation of Innovation in the UK
Other proposed changes in s suggest further R&D projects to the UK and exclude overseas projects from R&D qualifying costs. This indicates that subcontracted R&D projects will only be eligible if the third party involved in the R&D project is in the UK. Similarly, the cost of external workers is eligible under the R&D tax relief scheme, but according to this plan, HMRC will also impose restrictions on the eligibility of external workers. The third-party workers will be considered eligible only if paid via UK payroll. Similarly, independent research projects will qualify under the research and development expenditure credit RDEC scheme if R&D activities occur in the UK.
3. Changes in approach to mitigate abuse and improve compliance.
HMRC has planned a change in approach to prevent abuse and improve compliance. These changes include shifting R&D claims to the digital system, and eligible bodies will only make all the claims via HMRC’s COTAX portal. R&D tax relief claims will require the name and detailed information of the company’s senior officer, and details of the agent company involved in assistance to compile the claim. In the future, if the company plans to make an R&D claim, it will have to notify HMRC beforehand.
These are proposed changes by HMRC for R and D tax credit claims which are expected to come into effect from April 2023. If you want more information regarding HMRC R and D tax credit claim and the impact of these changes on your business, feel free to contact our R&D tax specialists.