As part of the government’s tax administration and maintenance announcements following the Autumn Budget statement, HMRC have released further information on several key changes to the R&D tax credit system in the UK.
Their overall policy objectives remain the same; to ensure that the UK remains a competitive location for cutting edge research, that the R&D tax reliefs remain fit for purpose and that taxpayer money is effectively targeted.
Data and cloud computing costs
The following new categories of qualifying R&D expenditure will be brought into the tax relief scheme from 1 April 2023:
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licence payments for purchasing datasets which are used directly for R&D
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cloud computing costs that can be attributed to computation, data processing and software
Whilst these measures are very welcome, they were first proposed in the 2020 R&D consultation and so it will have taken HMRC almost three years to change a policy that has been out of date with the modern world for many years.
Refocusing the relief towards innovation in the UK
The government intends that from 1 April 2023:
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where companies subcontract R&D to a third party, they will in future only be able to claim relief for expenditure where the third party performs the work in the UK
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under both R&D schemes, where expenditure is incurred on externally provided workers (aka EPWs), they will only be able to claim relief where those workers are paid through a UK payroll.
This is going to severely reduce a number of companies’ R&D tax credit claims where, for example, they have overseas subsidiaries in key locations for specific labour markets. By commenting on the draft legislation, we can hopefully achieve a response which results in exceptions to these rules to allow R&D claims on certain overseas activity.
Abuse and compliance
Concern over abuse and boundary-pushing involving the R&D tax reliefs led to the National Audit Office extending the qualification of HMRC’s 2019-20 accounts due to the estimated level of fraud and error of £311 million.
HMRC’s next steps to improve compliance announced in the report include:
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further increase in resource for R&D tax credit compliance from HMRC, with the creation of a new cross-cutting team focused on abuse
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all claims to R&D tax relief will in future have to be made digitally (unless exempt from Company Tax Returns online)
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the digital claims will require more detail on qualifying R&D expenditure, the nature of the advance in science or technology and the technological uncertainties overcome
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each claim will need to be endorsed by a named senior officer of the company
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companies will need to inform HMRC, in advance, that they plan to make a claim, and
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claims will need to include details of the agent who has advised the company on compiling the claim.
It is not clear from the HMRC report when these new compliance requirements are going to come into effect. Many firms of qualified accountants are already compliant with the majority of these policies, as a result of compliance with their professional bodies’ requirements in relation to Professional Conduct in Relation to Tax (‘PCRT’). However, this is clearly intended to increase the standard of R&D claims across the whole of the R&D tax credit industry, and so these new measures are very welcome.
The next steps
For more information about the impact of the reforms on your own business, or to discuss your potential for an R&D tax claim, please contact Kevin Edwards, or your usual UHY adviser.
