29 March 2022

The landscape of UK R&D tax is going to change significantly from 1 April 2023, as the UK are expecting a number of changes to the R&D scheme, the changes of which, were first announced in the 2021 Autumn Budget, as well as published in HMRC’s report for R&D Tax Reliefs.

The changes announced aim to modernise the regime by extending the relief to cloud computing costs, to refocus the incentives on UK based R&D, to improve compliance by deterring fraud and errors, and finally to resolve some flaws of the current rules. 

The proposed changes will affect businesses in positive ways, while for others, it could mean significant reductions in tax credits that a company receives. 

The Key Changes

The most significant changes that have been announced are as follows:

  • Refocusing R&D incentives on UK activities;
  • The new inclusion of cloud computing and data costs in qualifying R&D expenditure;
  • HMRC to focus more on tacking abuse and on compliance.

Changes to R&D tax credits for overseas activities 

Under current rules, overseas R&D costs recharged to a UK claimant company qualify for R&D tax incentives in the UK. However, from the 2023/24 tax year, R&D activity will have to be physically located in the UK for the costs to be included.  UK companies who currently claim R&D costs paid to, for example, overseas group companies or overseas third parties may no longer be able to include these costs in their claims. 

The proposed changes will severely restrict UK R&D tax incentives for overseas R&D.  

See below for a clarification on how these changes could affect your claims:

  • Subcontracted out R&D will only qualify for R&D incentives where the third party undertakes the R&D in the UK;
  • Under the research and development expenditure credit (RDEC) regime, payments to Qualifying Bodies (e.g. universities or health bodies) to undertake independent research will only qualify if the activities are undertaken in the UK; and
  • Payment to Externally Provided Workers (workers provided by third party staff providers) will only qualify where the workers’ salaries are paid through a UK payroll.

The impact of this change will largely depend on the size of your business and the amount of R&D taking place outside the UK. 

Claims for cloud and data expenditure 

At present, costs related to cloud computing and data cannot be included within R&D tax incentives claims.  However, from 1 April 2023, these costs will be qualifiable.  

This new addition will mean businesses that, for example, pay licence fees to rent cloud computer storage space, or pay for data costs in the context of R&D will now be able to incorporate these costs into their claims. 

Tackling abuse and compliance

The government have concerns over the validity of certain R&D claims that are being submitted. HMRC estimates that error and fraud across both R&D tax relief schemes amounts to 3.6% of total relief cost, or £311m. There are also concerns over the growth of R&D advisers who are typically not members of professional bodies or have no background in tax.

The government want to introduce new measures to combat abuse and improve compliance from April 2023, including:

  • All claims will have to be made digitally;
  • Digital claims will require more details to substantiate the claims (unclear precisely what this will mean and in what format);
  • Each claim will 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 (unclear if this is at a project or company level, or what the time frames will be); and
  • Claims will need to include details of any agent who has advised the company on compiling the claim.

HMRC recently hired an additional 100 inspectors to deliver more robust and consistent reviews of R&D submitted claims.  This means that we will be likely to see more enquiries into R&D tax incentives claims going forward. 

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