At the Autumn budget 2021, Chancellor Rishi Sunak announced the government’s appetite to reform R&D tax relief in order to:
- Support and encourage modern research and development techniques
- Refocus support towards UK innovation
- Target abuse and improve compliance
The UK Government has now released further information on how this will be achieved in practice.
Support and encouragement of modern research and development techniques
It has been confirmed that data and cloud computing costs will become a valid cost category for R&D expenditure, with the following brought into scope:
Licence payments for dataset
Datasets have become a vital R&D input for companies across a wide variety of sectors. Therefore, expenditure via licence payments on purchasing datasets used directly for research and development in a qualifying R&D project will be eligible, on the understanding that the dataset cannot be resold or have a lasting value to the business beyond the duration of the project.
Cloud computing and software
Businesses will be able to claim for the cost of cloud computing used directly for R&D purposes, including costs that can be attributed to computation, data processing, analytics and software.
Refocus support towards UK innovation
The current guidance stipulates that companies are able to claim relief on R&D activity conducted overseas. This is set to change. Where companies subcontract R&D activity to a third party, they will in future only be able to claim relief for that expenditure if the third party performs the work in the UK. Similarly, payments for externally provided workers will only be eligible where those workers are paid through a UK payroll.
Target abuse and improve compliance
There has been an ongoing concern over the abuse of the relief. More recently, there has been an emergence of unqualified R&D advisers, who are not members of professional bodies or have no background in the field of tax, using clever marketing campaigns to take advantage of businesses who are unfamiliar with the relief. Their only intent is to maximize on their high fee structure; thus willing to submit dubious claims.
HMRC intend to make the following changes to ensure companies are encouraged to take advice from qualified and experienced agencies:
- All claims will need to be submitted digitally (except from the companies who have the exemption to deliver a tax return online)
- All claims will require more detail to substantiate the claim
- Each claim will need to be endorsed by a named senior officer of the company
- Companies will need to inform HMRC in advance that they plan to submit a claim
- Claims will need to include details of any agent who has advised the company on compiling the claim
All of the above reform areas will take affect from April 2023 and will be included in the Finance Bill 2022-2023. Any necessary legislation will be published in draft in Summer 2022.
Matthew Jones, managing director at LimestoneGrey, commented:
‘The legislative changes afoot will undoubtingly receive mixed reviews dependent on the set up of your company’s R&D activities. The inclusion of data and cloud computing expenditure will have such a positive impact on many companies who have needed to exclude these costs from previous R&D tax credit claims, even though they have been an essential tool in delivering their project.
On the other hand, if your company has historically relied upon oversea subcontractors, a decision will need to be made on whether you forgo that category of expenditure in future claims or you alter the way in which your R&D is structured. The fact that these changes are not being implemented until April 2023 will allow companies the time to assess and make decisions.
Any further support from HMRC to eliminate unregulated, unqualified agencies is always positive. It is essential that companies gain access to the right support and advice for what is a technical area of tax law.’