On 30 November 2021 the government announced plans to implement a number of changes to research and development (R&D) tax reliefs and introduce measures to target abuse. Phil Hartley, director of tax at North West accountancy firm Mitchell Charlesworth comments on the new rules, which will be introduced from April 2023.
As part of Tax Administration and Maintenance Day the government published a report on Research and Development (R&D) tax reliefs, providing further details on announcements made at the Autumn Budget 2021 which included refocusing support towards innovation in the UK, expanding qualifying expenditure to capture cloud and data costs and measures to target abuse and improve compliance. In this article we look at the changes in more detail.
Refocus towards innovation in the UK
Businesses can currently claim relief on R&D activity that is carried out overseas by subcontractors but there is a perception that the government is paying for R&D work at a cost to the UK taxpayer. Under the new rules proposed by the government from April 2023 there will be no relief for R&D activity subcontracted to a third party unless the work is undertaken in the UK and externally provided workers would only be eligible for relief if they are paid through a UK payroll.
Making it more targeted in this way will have a bigger impact on larger comBusiness insolvency – recognising the warning signspanies rather than SMEs but all companies will need to consider how their R&D activities are structured to ensure the costs remain allowable in the UK. This could also entice international businesses to physically undertake R&D activity in the UK to benefit from the tax relief.
Claiming relief for cloud and data costs
The report introduces two new categories of R&D expenditure which will become eligible for tax relief from April 2023: licence payments and creation costs for datasets and cloud computing costs attributable to computation data processing and software. These changes should modernise R&D tax relief for up-to-date spending patterns and support modern research methods.
Abuse and compliance
The government have concerns over the validity of certain R&D claims that are being submitted. HMRC estimates that error and fraud across both R&D tax relief schemes amounts to 3.6% of total relief cost, or £311m. There are also concerns over the growth of R&D advisers who are typically not members of professional bodies or have no background in tax.
The government want to introduce new measures to combat abuse and improve compliance from April 2023, including:
- a requirement that R&D relief claims be made digitally
- claims are endorsed by a named senior office of the company
- claims would require additional detail surrounding the costs that have been incurred and the projects that have been undertaken
- HMRC would need advance notice before any claim is made
- HMRC would need details of any agents who advised the company on making the claim.
Whilst this is likely to impact R&D claims moving forwards, it can be seen as a positive for the relief as a whole as it will ensure that the businesses who are genuinely undertaking these activities will continue to benefit from this valuable relief.
Given this tougher approach from the government businesses need to ensure that a claim is valid and that all available costs are considered and captured, which is where we are available to provide advice and support and have a great track record of assisting our clients in maximising the support available to them.
The report confirms that the government plans to issue draft legislation on the R&D tax relief changes in summer 2022, with the measures being introduced in the Finance Bill 2022-23, and it will ask for stakeholders’ views on how these changes should be implemented. The new rules will not be introduced until April 2023 which provides a valuable opportunity for businesses to plan ahead.
For advice and guidance on R&D tax relief and if it is applicable to your business, please contact Phil Hartley, director of tax at Mitchell Charlesworth, below.