How is R&D Tax Relief Going to Change?

Back in the 2021 Spring Budget, Rishi Sunak announced a consultation of the R&D tax relief scheme. Since the initial consultation has been completed, some proposed changes have been outlined in the Autumn Budget including: 

• The inclusion of data & cloud costs to qualifying expenditure.
• Updates to refocus support towards UK-based innovation.
• Changes to tackle abuse and improve compliance.

Draft legislation is expected to be published in summer 2022 with changes taking effect in April 2023.

Data and cloud costs 

Responses from the consultation highlighted that managing data and cloud infrastructure is a vital part of the R&D process. Since launching the R&D tax relief scheme, the world has changed with technology having a part to play in this. Expenditure such as data purchases and cloud hosting should qualify as expenses. 

From April 1st 2023, the following new categories of qualifying R&D expenditure will be eligible for relief:

• License payments for purchasing datasets that are used for research and development.
• Cloud computing costs that can be attributed to computation software and data processing.

Focusing on innovation in the UK 

Under the existing rules, companies are eligible to claim R&D tax relief for overseas research they conduct. In order to ensure the UK economy is benefitting from the tax relief as intended, some changes have been announced:

• Where a company has subcontracted R&D to a third party, only work performed in the UK will be able to be claimed.
• Where companies have incurred expenditure on payments for externally provided workers, they will only be able to claim relief on workers who are paid through a UK payroll.
• If a company subcontracts work to be performed overseas, it would not be able to claim R&D tax relief on that expenditure – but it would still be able to deduct those costs from taxable profits in the normal way.

Companies will still be able to claim R&D tax relief on the costs of software and consumables sourced overseas, as well as payments for clinical trial volunteers overseas and payments for data and cloud services sourced overseas, as these are considered inputs to activity in the UK.

Abuse and compliance

In recent years there have been growing concerns over the abuse and boundary-pushing of the R&D tax relief scheme. There have been instances of advisors taking advantage of companies that are not familiar with claiming R&D tax relief. To combat this, several steps will be introduced to improve compliance, including:

• Requiring all claims to be made digitally (except those companies exempt from the requirement to deliver a company tax return online).
• Asking for more detail within the claims process. In-particular on what expenditure the claim covers, the nature of the advance sought, the field of science or technology and the uncertainties overcome.
• Claims will need to be endorsed by a named senior officer of the company. Companies will also need to inform HMRC in advance that they plan to make a claim.
• If through an advisor, claims will need to include details of the agent.

How to prepare for upcoming changes to R&D tax relief?

With the new changes coming into effect soon, it’s essential to adopt a robust approach to claiming R&D tax credits. If you don’t, you run a higher risk of an enquiry from HMRC and your claim being unsuccessful.

Important points to consider:

• Consider sub-contractors carefully and try to ensure your R&D is conducted in the UK when possible. 
• It could be a good time to start to consider projects to advance your IT infrastructure, and conducting more work to bring it into the cloud when the new costs are eligible from 2023.
• Now is the time to seek professional advice on R&D tax relief. Particularly for those small businesses and start-ups who suspect they will be affected negatively by these changes.
• Ensure you’re confident your advisor is aware of the new rules.

If you would like to learn more about how to make sure your claim is robust and optimised, get in touch and speak with one of our experts.

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