Forthcoming R&D tax relief legislation changes

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The Government published draft legislation for the forthcoming Finance Bill 22/23 on ‘L-day’ – 20 July 2022. The Finance Bill is the vehicle for renewing annual taxes, delivering new tax proposals, and maintaining administration of the tax system.

The legislation changes aim to refocus the reliefs towards Research & Development (R&D) in the UK and to implement measures to improve compliance, with the intent to provide better targeted support for innovation in the UK.

The reforms summarised below are intended to be effective for accounting periods beginning on or after 1 April 2023 and cover changes to both the R&D Expenditure Credit (RDEC) for large companies and the SME R&D regimes.

Extending qualifying expenditure

The changes in modern computational approaches have led to the scope of qualifying expenditure being extended to include the costs of datasets and cloud computing.

To further support cutting edge R&D, changes will be made to the definition of R&D, to remove the exclusion of pure mathematics.

Refocusing the reliefs towards innovation in the UK

To ensure the maximum benefit to the UK from the R&D tax credit scheme, qualifying R&D activity for subcontracted work and the cost of externally provided workers will be limited to UK activity.

There will be some narrow exemptions where factors such as geography, environment, population, or other conditions that are not present in the UK are required for research (for example, deep ocean research) and where there are regulatory or other legal requirements for certain activities to take place in specific territories (for example, clinical trials).

Tackling abuse and improving compliance

The changes aimed at targeting abuse and improving compliance, include the following.

  • R&D claims must be made digitally through HMRC’s tax return portal.
  • ‘New’ claimants will be required to make a claim notification within six months of the end of the claim period. Companies that have claimed (or made a notification) in one of the preceding three accounting periods will not need to pre-notify.
  • Claims will need to include details of any agent who has advised the company on compiling the claim.
  • Claims will need to be fully endorsed by a named senior officer of the claiming company.

HMRC have not yet specified the exact information to be provided with the notification, nor the form or mechanism by which the notification must be made. This will be provided through secondary legislation.

Previously announced measures to address anomalies and unforeseen consequences

Several changes are also proposed to correct existing anomalies and ensure the reliefs operate as intended.

  • Health and Social Care Levy (HSCL) staff costs will be treated in the same way as costs incurred on NIC
  • Amendment to the ‘Going Concern’ requirement to enable companies that have transferred a trade to a connected party to still be eligible for R&D relief
  • The time limit for amending claims (two years) has been removed, allowing companies to claim RDEC instead where they had previously erroneously claimed SME relief
  • Supporting businesses transitioning between schemes including:
    • where a company is sold from a large group to an SME group, the company can access SME relief in the year of transaction;
    • where a company was treated as an SME and a linked enterprise becomes large the company will continue to be treated as an SME for that accounting period and the following accounting period.

The above changes represent several significant changes to both the structure and administration of the R&D tax incentives schemes. We would recommend that R&D claimants get professional advice to understand the implications for future claims and to take actions to ensure the processes for making their claims remain compliant with all supporting information available.

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