R&D tax relief – major changes confirmed and action needed now
On Wednesday 20th July 2022, HMRC set out in detail its upcoming reforms to the R&D Tax Relief schemes that will form part of the next Finance Bill. Alongside some minor legislation updates to address anomalies in the schemes, the reforms as they stand will cause four major changes to the schemes. The first of which (see below) could catch out start-ups, smaller companies and those who haven’t claimed recently.
1 - Pre-notification of claims
Companies will need to notify HMRC that they plan to make a claim within six months of the end of the accounting period to which the claim relates. This notification will be made online. If a company has made a claim in any of the past three accounting periods, then they do not need to notify HMRC.
Start-up companies and those who might have claimed before, but not in the last three years, need to be aware. The six-month limit applies to the first accounting period – so the ability to go back two years will be impacted if HMRC are not notified.
It's also worth noting that HMRC have history in terms of retrospective changes. They are asking for feedback on the draft legislation, but could well just forge ahead with the regulations as they stand. Retrospection is a real possibility - and one which should be mitigated by moving ahead with claims now.
2 - Submission of claims
All claims will have to be submitted digitally. The submissions will have to include a description of the R&D, a breakdown of qualifying costs, details of any R&D agent who has advised on the R&D claim and be signed-off by a senior officer of the company. Specific details on the new requirements are yet to be published.
ABGI’s claim process has always provided detailed breakdowns and we welcome these measures to tackle abuse of the scheme.
3 - Restriction of overseas subcontractor and externally provided worker costs
Expenditure incurred on subcontracted activities and externally provided workers will only be allowed for activity carried out in the UK. Narrow exemptions to this restriction apply where the research requires specific geographical, environmental, demographic, or other conditions that are present in the UK. The cost of R&D or availability of workers are not conditions for exemption.
ABGI lobbied for these exemptions during the consultation process so we are delighted that they have been incorporated in the reforms.
4 - Introduction of cloud computing costs and pure mathematics eligibility
The government have confirmed the extension of the scope of qualifying expenditure to include costs of datasets and cloud computing. The definition of R&D for tax purposes is also being extended to include advances in pure mathematics.
As above, ABGI lobbied for these exemptions during the consultation process. It’s great to see HMRC recognising the evolution of R&D and activities and expenditure which facilitate it.
As things stand, the above measures will apply for accounting periods beginning on or after 1st April 2023 and the government is currently inviting feedback on the draft legislation until 14th September 2022. The possibility of changes being applied retrospectively is a real concern. One could argue that an effective date of 1st April 2023 is creating a window of opportunity for those looking to abuse the scheme. Our simple advice is to act now - seek advice and move ahead where appropriate.