Businesses consulted on changes to R&D tax reliefs

Businesses involved in Research & Development (R&D) are being invited to give their views on the draft Finance Bill 2022-23 (the Bill) covering changes to important tax reliefs due to come into force next year.

The House of Lords Finance Bill sub-committee has invited companies to contribute to its inquiry on reforms to R&D tax credits in the Bill.

Businesses are being asked to comment on the proposed legislation, which aims to incentivise business investment, extend the scope of qualifying expenditures in data licensing and cloud computing costs, and increase R&D activity in the UK.

The committee says it is particularly interested in the experiences of SMEs in claiming relief and how they expect the upcoming changes to affect them.

HMRC started the consultation process in 2020, with changes due to come in after 1 April 2023 outlined here:

Data sets, cloud computing and pure mathematics

Given the demand for data services, businesses will be able to include the costs of purchasing data for R&D projects or using cloud computing services.

This new addition will mean businesses that, for example, pay licence fees to rent cloud computer storage space, or pay for data costs in the pursuit of R&D, will now be able to build those costs into their claims.

Many businesses will benefit from this change, particularly in technology and media, and could mitigate losses from the restrictions to overseas R&D costs.

These areas will now come under the R&D qualifying expenditure umbrella and R&D for tax purposes will now also include pure mathematics.

Focussing on the UK

R&D reliefs will be focussed on the UK from 1 April 2023, subcontracted R&D work and the cost of externally provided workers (EPWs) will be limited to work undertaken in the UK.

The Government has indicated that it does not want to introduce a rule that discriminates against businesses that cannot practically carry out research in the UK, but it doesn’t want to prevent the offshoring of R&D.

A list of exemptions is being worked on which will be tied to environmental, geographical, legal or regulatory reasons. There may also be an exemption for certain specialist skills, such as consulting world-leading experts in a particular field.

Cracking down on abuse

HMRC has voiced concern over certain R&D claims and actions and has allocated an additional 100 inspectors to deliver greater scrutiny.

New rules for claims include:

  • Claims must be made digitally
  • Categories of qualifying expenditure incurred should be disclosed and brief details of the R&D activities provided
  • A senior company officer must endorse the claims
  • Companies must inform HMRC in advance of their intention to claim within six months of the end of the accounting period to which the claim relates, unless they claimed in one of the preceding three periods
  • Claims must include details of any agent who has advised the company on it.

For help and advice on R&D claims and related matters, please contact us today.

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