What changes have been made to R&D tax relief?

What changes have been made to R&D tax relief?

HMRC released amendments to the Research & Development Tax Credits scheme via the draft Finance Bill 2022-23. The changes are designed to refocus on innovation and to tackle fraudulent claims.

These R&D tax relief changes are to the existing R&D Tax Credits scheme. These changes will come into effect from 1st April 2023 and will affect companies that claim R&D Tax Relief under the R&D Expenditure Credit (RDEC) and the small or medium enterprises (SME) R&D relief.

In this blog we remind people of the main changes to R&D tax relief that will take place in 2023.

What areas does the reform cover?

Many of these amendments were announced within the Autumn 2021 budget, including:

• Allowing cloud computing and cloud and data expenditure.

• Restriction of subcontracted R&D to only that carried out in the UK.

• Improved compliance procedures to crackdown on the rising level of suspected fraudulent claims.

   

Measures

The level of abusive claims & submission requirements for claims

The figures for HMRC, from the National Audit Office, estimate that the level of erroneous claims for R&D tax reliefs across both the SME & RDEC schemes for 2021-22 was a staggering £469m, up almost 40% on the 202o-21 estimated figure of £336m. It is important to note that these figures include both fraudulent claims and genuine errors.

It was recently reported in The Times and CityA.M that tax authorities have arrested eight people over alleged fake R&D claims. This is separate from the jailing this year of three men involved in a fraudulent £29.5 million claim for R&D tax relief on a bogus health IT project.

Weak checks by HMRC on the schemes have created a ‘cottage industry’ of supposedly ‘specialist R&D tax credit advisors and companies’ that push the boundaries too far and potentially make bogus claims on behalf of clients.

This type of behaviour affects the whole industry and for people like myself and credible and experienced companies such as Haines Watts we’d all like to see an overhaul of the regime and firms needing to belong to a professional body to cut down on these ‘boutique’ consultancies that push the boundaries or make bogus claims.  

To tackle abuse of R&D reliefs, all claims, either for a deduction or a tax credit, will in future have to be made digitally (except from companies that are exempt from the requirement to deliver a Company Tax Return online).

From 1 April 2023, the claimant company must inform HMRC of their intention to claim within six months of the end of the relevant accounting period.

However, this will not apply to companies who have claimed within any of their preceding three accounting periods. Each claim will need to be endorsed by a named senior officer of the company and will need to include details of any agent who has advised the company on compiling the claim.

UK qualifying expenditure

Currently, companies claiming under either the SME or RDEC scheme can claim their eligible subcontractor overseas costs regardless of where the activities are performed.

The new regulations state that, for accounting periods starting on or after 1 April 2023, subcontractor and externally provided worker (EPW) costs will be limited to UK expenditure only.

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). The exemptions will not include cost, or workforce availability.

R&D group relief

Under present regulations, should a company exceed the SME qualification bracket and fall within the ‘large’ company bracket, the company can continue to claim under the SME scheme for one further year, however, the other group members are not entitled to the additional year.

The changes mean that this additional year of SME status can now benefit all members of the group for claims from April 2023.

Data costs

To incentivise R&D using modern IT approaches, the government is extending the scope of qualifying costs to include data costs related to the use of datasets and of cloud computing.

To further support cutting edge R&D, the government will update the definition of R&D for the tax reliefs, to include pure maths. This is great news if you’re using pure maths in areas such as AI, quantum computing, risk analysis or algorithms, as you can now include these costs in your R&D claim.

New compliance requirement

In the future, R&D claims will only be considered valid if certain disclosures are made to HMRC. These disclosures are likely to include:

• A detailed description of the R&D undertaken.

• A breakdown of qualifying expenditure.

• Details of any agent who provided advice.

• Signature of a senior officer of the claimant company.

All companies making R&D tax relief claims will need to start preparing and recording relevant R&D data to ensure future compliance.

Why have changes been made?

In March 2021, the government launched a wide-ranging review of the way that business R&D is incentivised in the UK through the tax system. This review began a period of substantial change for R&D tax reliefs. The changes announced are following this period of review to make the R&D tax relief regime wider ranging and to cut down on erroneous or abusive claims. The changes are currently draft legislation.

The wider review considers all aspects of the incentives – from the definition of R&D to the expenditure which attracts relief, to the mechanism for giving relief through to the administration of the reliefs by HMRC.

When will these changes take place?

These changes to UK’s R&D tax relief rules are set to commence on 1 April 2023.

What businesses will the changes impact?

These changes will affect companies that conduct research and development and claim R&D tax relief under the following schemes:

1. The small or medium enterprises (SME) R&D relief.

2. The Research and Development Expenditure Credit (RDEC)

3. It will also affect some companies which have made a Patent Box election.

    

How can Haines Watts help?

Our R&D tax team consist of R&D experts that are plain-speaking professionals who translate intricate tax legislation into easy to understand language. Haines Watts also combine R&D tax expertise alongside our extensive experience of owner managed businesses to maximise R&D claims. 

We understand how other business and tax matters interrelate with R&D tax credits claims. For example, the business structure and remuneration of key directors can have a significant impact on the level of qualifying expenditure so you need an advisor who can look at the wider picture.

Our R&D team are on hand to help you continue to make compliant claims for research and development tax relief and keep you up to date with the complex changes coming into play.

Conclusion

These changes are wide ranging with the expansion of qualifying expenditures to cover data and some cloud computing costs, refocusing R&D relief on activity carried out in the UK and a package of measures to target abuse and improve compliance.

R&D tax incentives can be complex, and the new legislation is likely to require significant changes to the way claims are made. Seeking advice early will be the best way to ensure that your company will continue to be able to access the generous reliefs. Contact us today if you need help and advice with R&D tax relief claims.