HMRC Changes to R&D tax schemes - How much do you know?

sThe Government has announced some significant changed to the R&D Tax Credits scheme, with HMRC increasing rigour in identifying claim errors, and raising the number of enquiries across the board. These changes will be included in the 2022-23 Finance Bill and will take effect from April 2023.

The upcoming Finance Bill will implement changes in claiming for R&D Tax Relief, with key changes being:

  • new allowable expenses in Cloud & Data costs,
  • overseas subcontracting being ruled out,
  • claims being submitted digitally with a full technical narrative - including sign off by a director,
  • and disclosure of the adviser that compiled the claim, together with pre-submission notification to HMRC.

We thought you’d like to know what the announced changes are and what they might mean to you. Now is the time for you to familiarise yourself with these changes and understand how they might impact on your clients’ R&D strategy over the next two years.

In the last couple of years, the adoption of cloud computing services increased in the UK, driven largely by the impact of the COVID-19 pandemic.

As a result, the Government has announced that data and cloud costs will be included as qualifying expenditure for both R&D tax schemes. This means the Government will allow businesses to claim relief for the cost of cloud computing services used directly for R&D. For example, costs which can be attributed to computation, data processing, analytics and software.

Are you ready for the changes?

Expanding the scope of qualifying expenditures to include data analytics and cloud computing will potentially increase the available benefit for some of your clients.

Has your team got sufficient software expertise to extract cloud and data costs from your client’s projects and then make an informed decision on whether or not they can be included in their R&D tax claim? If not, you’re risking submitting an inaccurate claim.

As you will already know, accuracy depends on a technical evaluation of the client’s projects and activities to assess how far their challenges and advances extend beyond the relevant industry baseline.

If you do not have the requisite technical knowledge or understanding of your client’s software activities to perform a thorough technical interrogation, you won’t be able to complete an accurate claim and could expose both yourself, and your client, to the risk of an enquiry.

At ABGI, our technical team continually update their understanding of the types of work that qualify under the scheme and how they may be seen as an advance in science or technology. This way, we ensure our clients’ claims are optimised “the right way”: by providing HMRC with the clear, concise descriptions of scientific advances and the systematic breakdown of costs that they require – and NOT by over claiming for ineligible work.

Our reputation for producing maximised, accurate and robust R&D tax claims means that we are sometimes called upon to defend claims that originate in-house or from other providers to rectify these!

Under the current rules for both schemes, companies can claim relief on R&D activity that is conducted overseas. This is about to change and might severely reduce the available benefit for some of your clients, such as international groups or businesses that undertake R&D activities overseas.

The proposed changes are designed to refocus R&D incentives on UK activities and are as follows:

  • Companies subcontracting R&D activity to a third party, will only qualify for R&D incentives if the third party performs the R&D work within the UK.
  • This will apply to the SME scheme, and a similar principle will apply in RDEC.
  • Under both schemes, expenditure on payments to Externally Provided Workers (workers provided by third party staff providers) will only qualify where the workers’ salaries are paid through a UK payroll.

Are you ready for the changes?

As ever when dealing with HMRC, these new rules aren’t straightforward and can cause confusion. For example, if a company subcontracts R&D work overseas, even though it would not be able to claim R&D tax reliefs on that expenditure –it would still be able to deduct those costs from taxable profits in the normal way. The company would also still be able to claim R&D tax reliefs on the costs of software and consumables sourced overseas, as well as payments for clinical trials volunteers overseas and payments for data and cloud sourced overseas, as these are considered inputs to activity in the UK.

Accountants will need to have an early conversation with their clients, giving them plenty of notice of the proposed changes and clear up any confusion, so that they have time to rethink their R&D their strategy if they need to.

Your clients might need to consider how their R&D activities are structured to ensure the costs remain allowable in the UK. This could also encourage international businesses to physically undertake R&D activity in the UK to benefit from the tax relief.

We encourage you to get in touch with us with any questions you might have about how the above changes might impact your existing, or prospect client base. We believe you should encourage them to take external advice in order to recalibrate the way they are making claims, and we will be very happy to help by providing insight directly to them in a no cost review of their current understanding and how the R&D Tax Relief legislation will be applied to their circumstances.

The new rules won’t be introduced until April 2023 which provides a valuable opportunity for businesses to plan ahead.

Concern over abuse and boundary-pushing involving the R&D tax relief schemes has skyrocketed in recent years. HMRC estimates that error and fraud across both R&D tax relief schemes amounts to 3.6% of total relief cost, or £311m.

To combat abuse and improve compliance, the government proposes to introduce new measures, such as:

  • All claims to the R&D reliefs – either for a deduction or a tax credit – will in future have to be made digitally
  • These digital claims will in future require more detail – for example, on what expenditure the claim covers, the nature of the advance sought, the field of science or technology, the uncertainties overcome
  • Each claim will need to be endorsed by a named senior officer of the company

Are you ready for the changes?

Your choice of R&D Tax Relief Partner has never been more important.

The government requiring even more granular detail to R&D claims in order to ensure compliance, makes it more important than ever for accountants to submit accurate and robust claims. Claims that are not accompanied by robust detailed technical reports identifying: the nature of the eligible expenditure; the uncertainty; and the specific technological advancement sought, will inevitably be the first ones flagged by HMRC under the new rules.

And, with HMRC requiring each claim to be endorsed by a member of the senior management team, your clients will have to thoroughly understand what has been claimed and why, along with the extensive R&D tax legislation and HMRC guidance before signing-off on the submission. They will seek technical expertise as standard in their accountants and will be wary of engaging with agents with lower technical knowledge who could put their claim, but also their reputation, at risk.

Your chosen R&D specialist should have a team of credible technical experts who can offer relevant industry experience related to the field where your client’s advancement is being made. At ABGI, our industry specialists not only understand the technical context of what your clients do but also how it relates to specific clauses within HMRC’s guidance to the legislation enabling them to fully interpret eligible activities and expenditure.

Our technical team continually update their understanding of the types of work that qualify under the schemes and how they may be seen as an advance in science or technology. This way, we ensure our clients’ claims are optimised “the right way”: by providing HMRC with the clear, concise descriptions of scientific advances and the systematic breakdown of costs that they require.

The lucrative nature of the R&D tax relief market means we've seen a number of companies setting up as R&D tax relief ‘experts’ without much governance or compliance, and low professional standards. Not only do they threaten the reputation of reputable R&D tax advisers, but they can also have a detrimental impact on the businesses they advise.

To protect the integrity of the R&D tax reliefs scheme and tackle abuse, HMRC proposes that, under the new rules:

  • Companies will need to inform HMRC, in advance, that they plan to make a claim
  • Claims will need to include details of any agent who has advised the company on compiling the claim

Are you ready for the changes?

Understanding what HMRC is looking for and how it functions is essential for anyone hoping to benefit from the scheme.  HMRC now asking for advance notification that a claim will be submitted means its vitally important that your clients’ submissions are fully compliant and eligible at this first review stage, or they will likely lose their right to submit a claim. It is imperative that sufficient granularity can be provided to not only support the R&D claim, but also to reassure HMRC that the costs will be compiled correctly.

And finally, with HMRC now asking that R&D claims include details of the agent who has advised the company on compiling the claim, your practice will need to take partial responsibility for the claim, which could expose you to risk.

When it comes to making an R&D claim on behalf of your clients, what aspects do you rely on the client to contribute? If your clients do not understand the guidelines and struggle to grasp how to assess their project activities against legislation, you would need to do this for them. Doing so would require a serious time commitment from your side as well as significantly more technical knowledge; this is just not feasible for you.

At ABGI, we bridge the knowledge gap and any associated risk to you. Our Technical Analysts take ownership and responsibility for the process. They carry out over xxx R&D tax relief claims a year, so their knowledge and experience of the legislation is unequalled. This includes handling any questions that may arise from HMRC. At ABGI we stand behind every single claim we submit and offer enquiry defence to our clients as standard service. In the event of an enquiry, you can rest assured we will actively defend the claim on your client’s behalf. In fact, our reputation for producing maximised, accurate and robust R&D tax claims means that we are sometimes called upon to defend claims that originate in-house or from other providers to rectify these!

WHAT'S NEXT?

The R&D tax credit scheme is a great initiative, helping to drive innovation and enhance the economy. However, with few barriers to entry into the R&D tax advisory market at present it can be difficult for companies to know whether the advisor they are seeking to appoint has the appropriate level of skill and experience.

At ABGI, we hold ourselves to the highest standards, and we believe everyone in the industry should be held to the same account. We will continue to push for a workable form of regulation as we believe it’s in the long- term interest of all tax advisors who, like us, already invest in quality people and proper management systems. Not only will it ensure companies have access to quality advice, it will also protect the integrity of the R&D tax credit scheme and increase the prospect of its continued funding by the UK Government.

If you have any questions about HMRC’s plans and the impact on claims, please get in touch on 0203 984 0321. Alternatively, you can email us at info@abgi-uk.com or even LiveChat us on our website.

Have a question?

Contact ABGI and a representative will get back to you to discuss your unique needs and explain how we can assist. Submit an enquiry or call us on 0203 984 0321