One of the proposals is that from April 2023 the cost of overseas workers will no longer qualify for UK R&D tax relief, thus focusing innovation within the UK.
At present, UK companies are able to claim R&D tax relief on R&D activity that is conducted overseas. To ensure the UK economy is benefitting from the tax relief, the government intends that:
- Where R&D is subcontracted to a third party, relief will only be available where the R&D is performed within the UK.
- Where R&D is carried out by “externally provided workers”, relief will only be available where those workers are paid via a UK payroll.
The purpose of the R&D scheme is to encourage scientific and technological innovation within the UK and following Brexit it is not a surprise that there is a tightening of the rules. However, these changes are likely to have a significant impact on many businesses that operate internationally and for whom it may not be feasible to use UK resources.
The government has stated that they are interested in views from stakeholders as to whether there are any cases for exemptions to allow for some overseas activity. Such exemptions may be due to a skills gap within the UK, meaning businesses are only able to source specialist skilled labour from overseas. It may also be for environmental or geographical purposes. For example, a business may be developing technology which operates in extreme weather conditions, so development work is required to be carried out in that particular environment.
Currently, this is a draft proposal, and draft legislation should be issued this summer. As the legislation is proposed to take effect from April 2023, this does not leave a lot of time for businesses to restructure and to consider bringing jobs onshore. We would therefore hope that the government either delay the proposed changes, or the rules are phased in, so that businesses have sufficient time to plan.
The next steps
For more information as to how the proposals may impact your business, please contact Sasha Talbot or you usual UHY adviser.
