UK R&D tax relief changes - are you prepared?
HM Treasury has released the long-anticipated draft legislation in response to their wide ranging R&D Tax Reliefs Consultation published last year. In the Spring Statement, the UK Government pledged their support to create ‘a new culture of enterprise’, with one of the three priorities being - a pledge to increase public investment in R&D, and doing more through the tax system to encourage greater private sector investment in R&D.
R&D tax reliefs are a key part of this strategy and the Government has recognised the need to ensure the reliefs are modernised, appropriately targeted and not open to abuse.
The draft legislation communicated on Wednesday 20 July was intended to bring clarity and certainty to businesses where R&D tax incentives are a key part of financing their innovations. Disappointingly, the details hoped for in some areas (such as the extent of mandatory documentation) were not included in the release, and secondary legislation is expected to expand on this.
Here are some of the key changes that we can confirm will be in effect for accounting periods starting on, or after 1 April 2023;
- A company will need to pre-notify that they are making a claim if they are a first-time claimant, or for those who have not made claims in the past three years. The notification must be made by six months after the period in which they intend to make a claim. HMRC have indicated that late notifications will not be accepted, so companies will need to be planning much further ahead when considering whether to make claims.
- It will become mandatory for claimants to share certain information when making a claim. The key documentation that will need to be shared with HMRC includes;
- a description of the R&D undertaken,
- a breakdown of qualifying costs,
- details of any agent who has advised on the R&D claim, and,
- sign off from a senior officer of the company.
While many claimants already share details of the R&D activities undertaken and a breakdown of costs, the requirement to disclose the agent supporting the claim preparation is new, as well as the need for a senior officer of the company to take accountability for the submission.
- Cloud and data costs will become qualifying cost types - however, these costs need to clearly align with direct R&D, and can not be included in R&D claims where these costs only relate to indirect supporting activities.
- Overseas costs relating to externally provided workers (EPWs), subcontractors and contributions to independent R&D (such as payments to universities) will no longer be eligible - except where the conditions necessary for the R&D are not present in the UK, but are present in the place where the R&D is carried out, and where it is wholly unreasonable for the company to replicate the conditions in the UK. The legislation confirms that these conditions could include geographical, environmental, social, legal or regulatory requirements - but do not include factors relating to the cost of R&D or the availability of skilled workers to undertake the R&D. This list is not exhaustive, and in the short term is likely to create greater uncertainty as to what could be seen as meeting these criteria.
- There is also welcome confirmation that the changes to the R&D rules will not adversely impact patent box claims.
While the detail on some areas is not yet clear, what is apparent is HMRC’s focus on increasing the accountability on claimants. Whether via the pre-notification for new claimants, mandatory documentation outlining details of the R&D undertaken, to requiring a senior officer to ‘sign off’ the claim - HMRC’s increased scrutiny on these incentives is set to stay for the long-term. The question now is; how will claimants ensure they can continue to optimise their claims, while making sure the balance of value to administration is maintained?
Contact us
