Recent updates and forthcoming changes to the R&D landscape

On 30^th November 2021, the government published a report on the R&D tax relief regime which set out specific details on the proposed changes to the R&D tax relief rules. The report published in November 2021 includes a summary of the consultation responses and outlines next steps for the review. The government has confirmed that the review is ongoing and will continue to consider reforming other aspects of the R&D regime.  

Proposed changes to the regime from 1^st April 2023

Inclusion of data and cloud computing costs 

With effect from 1^st April 2023, the scope of qualifying expenditure will be enhanced to include costs on data and cloud computing. This will include expenditure on licence payments for datasets and expenditure on cloud computing costs that can be attributed to computation, data processing and software, which will all be treated as qualifying expenditure for R&D tax relief purposes. 

This extension of scope in respect of qualifying costs is expected to be of great benefit to businesses that are using modern technology for their R&D projects. As such, this welcome announcement is expected to benefit technology-driven fast growth businesses. 

Refocusing the reliefs towards innovation in the UK 

Two significant changes were announced as part of the November 2021 report, in respect of restructuring R&D activities to those carried out in the UK. These are as follows:

• Where companies subcontract R&D activity to a third party, the subcontractor costs will only be eligible if the third party carries out work in the UK; and

• Where companies incur expenditure on payments to externally provided workers, the costs will only be eligible where the workers are paid through UK payroll.

The restrictions to subcontractor and externally provided worker costs will have an impact on a significant number of companies. There may also be practical challenges for businesses to identify what work is undertaken in the UK, particularly in respect of work performed by third parties. 

Abuse and compliance

Concern over abuse and boundary-pushing involving R&D tax reliefs has grown in recent years. The report highlights these concerns, particularly by R&D advisors with limited tax experience who have been involved in submitting ‘dubious’ claims where qualifying R&D criteria has not been met. 

As part of the next stage of this strategy, HMRC will further increase the resource for R&D tax credit compliance, with the creation of a new cross-cutting team focused on abuse. 

The Government has also proposed that all claims from April 2023 will be subject to the following rules:

• Companies will need to notify HMRC in advance that they plan to make an R&D claim;
• All claims will have to be made digitally (except from those companies exempt from the requirement to deliver a Company Tax Return online);
• A requirement for documentation to provide a breakdown of expenditure and key details on the R&D activities undertaken, including the scientific and technological uncertainties and advances;
• All claims will have to be endorsed by a named senior officer of the company; and
• Claims will need to include details of any agent who has advised the company on compiling the claim.

Stronger compliance checks may give rise to concerns over the growing complexity of the R&D claims process. However, other R&D updates suggest that this process will be made fairer and more seamless. This measure is understandable and unlikely to significantly hinder UK businesses. 

Addressing anomalies in the claims process 

The Government intends to support businesses growing and transitioning from the SME scheme to the less generous large company RDEC rules, by providing that where an SME within a group becomes large, all companies in the group will retain SME status for one year afterwards. 

Further, large companies that have mistakenly claimed SME relief can now reapply for RDEC tax credit on the same R&D expenditure. 

The time limit to amend an R&D claim will extend to two years from the end of the period of account to which it relates, rather than 12 months from the statutory filing which will allow companies to benefit from having more time to make a claim.

Next steps

The Government is welcoming responses to the report, with a deadline of 8^th February 2022. It is expected to publish draft legislation for the changes set out above in the summer of 2022 and invite views from stakeholders on the detailed implementation of these measures. Legislation will then be included in Finance Bill 2022-23 and the changes will come into effect from April 2023.

How can ETC Tax help?

The R&D tax rules are complex and can be difficult to navigate. It is therefore important for businesses to seek specialist advice. ETC Tax supports accountancy firms in preparing and submitting R&D claims for their clients. We are experts in the field and understand HMRC’s specific requirements, enabling businesses to get the most out of their R&D tax benefits. If you would like to speak to a member of our team about the R&D tax relief updates, your client’s eligibility and how ETC can help, please do not hesitate to contact us.