The Government announced in the Spring Budget 2021 a major consultation into R&D Tax Incentives. The objectives of the review were to ensure that the UK remains a competitive location for cutting edge research, that the reliefs continue to be fit for purpose and that taxpayer money is effectively targeted.
HMRC have now announced the results of the consultation and the policy decisions that will come from this. These changes are expected to be implemented from April 2023 which will significantly change the way in which the incentives scheme is implemented and managed.
Some of the key points to be taken from the announcement are below.
Abuse and compliance
The most significant change to be proposed is following ongoing concerns over abuse and boundary-pushing involving R&D tax reliefs, which has grown in recent years
There has been a recent emergence of R&D advisers, who are typically not members of professional bodies, cold-calling Small & Medium Enterprises (SMEs), suggesting they could make an R&D claim.
These advisers, many with no background in tax, take advantage of customers who are unfamiliar with claiming for R&D, often charging on a commission basis, and submit numerous dubious claims.
The commission basis can lead companies to view a claim as cost-free and some are willing to accept questionable claims.
The government therefore intends to make the following changes:
- all claims to the R&D reliefs – either for a deduction or a tax credit – will in future have to be made digitally
- these digital claims will in future 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
- each claim will need to be endorsed by a named senior officer of the company
- companies will need to inform HMRC, in advance, that they plan to make a claim
Refocusing the reliefs towards innovation in the UK
Under the current rules for both schemes, companies are able to claim relief on R&D activity that is conducted overseas.
Proposed changes
- where companies subcontract R&D activity to a third party, they will in future only be able to claim relief for that expenditure where that third party performs the work within the UK. The rules for subcontracting will not otherwise change. This will apply to the SME scheme, and a similar principle will apply in RDEC, where subcontracting occurs and where a company claims for contributions it makes for independent R&D of a qualifying body
- under both schemes, where companies incur expenditure on payments for externally provided workers (EPWs), they will only be able to claim relief on such expenditure where those workers are paid through a UK payroll
Data and cloud computing costs
At Autumn Budget 2021 the government confirmed that, following the earlier consultation on qualifying expenditure in July 2020, qualifying expenditure for both reliefs will be expanded to include data and cloud computing costs. This modernisation will ensure the reliefs better incentivise cutting edge R&D methods which rely on vast quantities of data that are analysed and processed via the cloud.
The following new categories of expenditure will be brought into scope:
- licence payments for datasets
• cloud computing costs that can be attributed to computation, data processing
