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:
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:
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:
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.