On 20th July 2022, HMRC published draft legislation for Finance Bill 2022-2023, announcing some significant changes to the R&D tax relief scheme.
Who will be affected by these changes?
These amendments announced in the draft legislation will affect companies claiming under both SME and RDEC R&D Tax Relief Schemes, which will come into effect from 1st April 2023.
The draft legislation includes changes to the eligibility and process of the R&D tax relief claim. In particular, measures to mitigate fraudulent claims, expansion of qualifying costs, making the claim process digital, and addition of new prerequisites to tackle the abuse of R&D tax relief have been introduced. This blog will elucidate these proposed changes to the R&D tax relief claim announced in the draft legislation.
• Expansion in Qualifying Costs
The government has announced the extension in the categories of qualifying expenditure for R&D tax relief claims. Software costs already qualify for the R&D claims, but now the government has proposed to extend the qualifying costs to include data and cloud costs. This amendment is going to be highly beneficial for the technology sector involving the usage of data and cloud computing. Moreover, from April 2023, you can also include projects seeking advancement in pure mathematics in your claim.
HMRC has also proposed that employee health and social care levy expenditure may qualify under staff costs for R&D tax relief claim.
• Limits to Overseas R&D Activity
In the latest draft legislation where the government has expanded qualifying expenditure, it has also announced the withdrawal of certain qualifying costs from R&D tax relief claims. As per the Autumn 2021 Budget, the R&D claim was to refocus on the R&D activities in the UK, so following that from April 2023, subcontracted R&D projects and externally provided workers will only be limited to the projects undertaken in the UK. This means you will be able to claim only for subcontracted R&D expenditure for the R&D activities carried out in the UK and the cost of externally provided workers (EPWs) that are paid via UK payroll.
There will be a few exemptions where projects are done overseas might be eligible for R&D tax relief claim as per geographical, social, regulatory or environmental needs. For example, according to HMRC’s guidelines, projects like clinical research where a specific patient sample is needed for a clinical trial or deep ocean research has its own particular geographical or environmental requirement to carry out research still qualifies for the claim. Moreover, this similar change will apply to SME and RDEC R&D tax relief claims.
As per our understanding of these limitations, eligibility for overseas subcontracted R&D work is judged by the criteria of ‘necessity’. However, there’s still ambiguity and requires further details to understand the impact of these regulatory amendments. Hopefully, additional guidelines will be issued regarding limitations and exemptions before April 2023 to further clarify these regulations.
• Addition of New Prerequisites
The UK government has proposed numerous amendments to the claiming process and prerequisites to tackle the abuse of R&D tax relief claims.
- To fight against fraudulent claims, the government has proposed that from April 2023, all R&D tax relief claims to be made digitally.
(This condition will not be applicable to the companies that are exempted from the requirement to file an online tax return.)
- To make R&D claims, companies need to break down their qualifying R&D costs across categories and provide a brief overview of the R&D activities.
- In addition, claims must be endorsed by the name of a company’s senior officer.
- A company must provide details of any agent who assisted your company in the R&D claim process.
- The most crucial change is that companies must inform HMRC six months in advance from the end of their accounting period about their plan of R&D tax relief claim.
Note: If companies are unaware of these changes from April 2023 and fail to meet the prerequisite mentioned above or to inform HMRC about their claim intention before the deadline, then they won’t be able to make an R&D tax relief claim for that accounting period.
How Will These Changes Affect Your Claim?
The government has proposed various steps to improve regulations and accessibility and mitigate abusive R&D tax relief claims. These changes to R&D tax relief 2023 are highly beneficial for technology sector businesses that use artificial intelligence, quantum computing and pure mathematics. It will lead to new opportunities in the tech sector. However, these changes in the R&D scheme have added a bit of complication for companies with overseas subcontractors to carry out their R&D activities or EPWs. And it is clear that HMRC will increase scrutiny on R&D tax relief claims for businesses that have outsourced their R&D activities overseas.
Many companies already file their claims digitally, but as per the latest proposed changes, digital filling along with project details is made mandatory. Additionally, informing HMRC six months before the end of your accounting period regarding your intention to claim increases the risk of missing out on incentives for first-time claimants, who are unaware of the changes. We believe that targeted compliance and a few additional measures can be effective against abuse of R&D claims. These changes in the requirements and process might sound complicated for now, but hopefully, with time, HMRC will clear out the ambiguities regarding these proposed amendments.
Square Finance can help you rethink proactively and create a strategic approach toward the R&D tax relief claims. Contact our R&D tax specialists for consultation and advice.