Since early last year, the research and development (R&D) tax relief system has been being primed for significant change.
A review launched at Spring Budget 2021, and a consultation published on 3 March 2021, was aimed at identifying opportunities to ensure that the UK remains a competitive and desirable location from which to undertake research, that taxpayers’ money is effectively targeted, and that the available reliefs continue to meet the needs of modern, cutting-edge businesses.
Whilst a number of measures are still being considered by Parliament, reforms to R&D tax relief that were announced at Autumn Budget 2021 are expected to take effect from April 2023, once legislated for in the Finance Bill 2022-23.
Overseas outsourced R&D
Under the new rules, any expenditure associated with subcontracting work overseas will not qualify for UK R&D relief, where costs are incurred after April 2023; though, costs can still be deducted from taxable profits.
Costs associated with Externally Provided Workers (EPWs) who are paid through a UK payroll, or where work is performed by a third party in the UK, will continue to attract relief, as will some inputs to activity in the UK (i.e., consumables sourced overseas).
Importantly, the Government has indicated that it does not want to disadvantage any business that cannot practically carry out research in the UK.
Consequently, the Government will legislate so that expenditure on overseas R&D activities can still qualify where:
- material factors that are required for the research, such as geography, environment, population, or other conditions, are not present in the UK; and,
- regulatory or other legal requirements mean that activities must take place outside of the UK.
The impact of these changes may be more severe for those international organisations with R&D activity spanning borders, regardless of whether or not the UK parent company is benefitting; however, it may serve to encourage more companies to assume their work in the UK, in order to claim relief.
Cloud computing
Businesses have previously been unable to claim for the costs of cloud computing and data use.
This has hampered some of the UK’s most innovative tech companies by excluding them from the tax benefits of the R&D credit scheme, simply because they utilise the capabilities of some third parties.
Under the Bill, businesses will be able to include the costs of purchasing data for R&D projects or using cloud computing services.
However, HM Revenue & Customs (HMRC) is still expected to provide clarity on the issues of usage and residual values in its upcoming guidance.
Amongst the other issues to consider is the challenge that comes with identifying cloud costs that relate specifically to an R&D project. Many businesses utilise a ‘rental’ type package throughout their operations, so apportioning costs to R&D may be tricky.
Other qualifying costs in relation to cloud computing may also be an issue, as it has been revealed that the costs of ‘data storage’ will not be allowed. Again, further clarity on what these rules cover should be provided in HMRC’s guidance later this year.
Anti-abuse action
There has been growing concern that the R&D tax relief system is open to abuse and so the new measures will include compliance procedures to deter speculative or fraudulent claims. This will include:
- An entirely digital claims system
- All claims to be substantiated with additional details
- Naming a senior officer of the company to endorse each claim
- Companies being made to notify HMRC, in advance, of their intention to claim; and,
- providing details of any agent who has advised the company on compiling the claim.
HMRC will also be given new powers to take enforcement action against those acting, questionably, as R&D tax advisers.
It is thought that alongside these measures, HMRC will invest further resources into conducting additional risk profiling and scrutiny of R&D tax relief claims.
Additional reforms
During his Spring Statement, the Chancellor alluded to the fact that he planned to introduce further changes to the R&D tax relief system in future to improve access to the support that it offers.
Within the Statement’s accompanying documents, the Treasury says that the steps it hopes to take could support an additional £5 billion of R&D funding by 2024.
One of these steps has already been revealed with the expansion and clarification of qualifying expenditure to include pure mathematics services.
Further details about reforms to the R&D tax credit system are expected later in the year, nearer to the Autumn Budget.
How can George Hay help?
Our expert tax advisers, in Biggleswade, Huntingdon and Letchworth are able to explain the complex rules associated with R&D tax credits, in layman’s terms, and they can assist you with preparing your claim, to ensure you have the greatest chance of success.
We can also advise you on issues like improving your record keeping, so that you can keep track of all the activities involved in the R&D process and the costs, so that all eligible expenditure is claimed for.
We make sure we understand our clients’ businesses as a whole, so we will not just look at your R&D in isolation. We will build R&D into your business planning so that you can use tax credit benefits as part of an ongoing strategy to grow your business and keep moving forward.
To discuss your current projects, or plans for the future, with one of our professionals in Cambridgeshire, Hertfordshire, or Bedfordshire, please contact us today.
Links: R&D Tax Reliefs – Report
