R&D tax relief scheme changes
Following on from the chancellor’s announcements regarding the R&D tax reliefs, further detail regarding the changes has now been announced.
The main changes to the scheme that take effect from April 2023
Overseas development and expenditure
The change that is expected to have the widest effect on companies is the change to overseas expenditure.
Subcontracted R&D activity to a third party, will only be eligible expenditure under the scheme if the third party performs the work within the UK. The rules for subcontracting will not otherwise change.
Again, with the rules for claiming Externally Provided Worker costs (EPWs), they will only be able to claim relief on this expenditure where those workers are paid through a UK payroll.
Data and cloud computing
It was announced that the scheme will expand the definition of qualifying expenditure to include the costs of accessing datasets, and licensing computer software that is hosted in the ‘cloud’.
The expenditure via licence payments on purchasing datasets which are used directly for R&D in a qualifying R&D project will qualify for relief.
These costs will not be claimable if the datasets can be resold or have a lasting value to the business beyond the duration of the R&D project. This will ensure that relief can be claimed only for costs incurred solely for R&D and not for costs that can be reimbursed.
Where companies need to conduct fieldwork in creating datasets, they should already be able to claim relief for the relevant staff costs, as long as this data is not collected for sale or other commercial purposes and directly contributes to the resolution of the scientific or technological uncertainty. This includes costs for staff-related expenditure for the purpose of collecting, cleansing and analysing data, provided these costs are incurred for a qualifying R&D project.
The scheme will now allow the cost of cloud computing services used directly for R&D. For example, costs which can be attributed to computation, data processing, analytics and software, to be claimed as qualifying expenditure.
This will exclude general overheads relating to the servers and data storage, this is in line with current rules, where relief is not available for general overheads such as rental costs.
Tackling abuse of the scheme
HMRC have announced that they will further increase the resource for R&D tax credit compliance, with the creation of a new cross-cutting team focussed on abuse.
The following changes will come into effect
- All future claims for R&D Tax reliefs will have to be made digitally (except from those companies exempt from the requirement to deliver a Company Tax Return online).
- Claims will require more detail , for example; on what expenditure the claim covers, the nature of the advance sought, the field of science or technology, the uncertainties overcome.
- The submitted claim will need to be endorsed by a named senior officer of the company.
- HMRC will need to be informed in advance that the company plan to make a claim.
- The details of any agent advising the claiming company on compiling the claim will need to be included on the claim submission.
The change in the claiming of overseas expenditure could have a large impact on many companies claims. The Office for National Statistics estimates that of the £47.5 billion of R&D spent in 2019, only £25.9 billion was privately financed in the UK. The government attributes this £21.6bn mismatch partly to R&D being done outside the UK.
We expected that data and cloud computing costs would be added to the list of qualifying costs, following the recent consultation. We hope this will be the start of regular reviews of the qualifying expenditure areas to make sure they are more up to date with modern business practices.
Tackling abuse of the scheme is in our eyes very important and we are pleased to see the changes announced. There is a widespread view that a number of claims are probably being paid that may not meet the scheme’s criteria.
The fact that a senior officer of the claiming company will now need to endorse the claim, will hopefully bring further internal scrutiny to claims. The adviser having to be named on the submission, should help identify those that are not providing accurate advice to companies.
Having the full technical and financial justification to support the claim is now a requirement, this is something that we have always felt should have been the case.
Companies now really need to assess the way their claims are produced and ensure that they are working with reputable companies and receiving the best advice.