In the Spring Budget, it was announced that HMRC was going to be completing a consultation into the R&D tax credit scheme. A few items were teased at the Autumn Budget, but now the full results have been released.
The changes from this consultation will take effect from April 2023 and will be included in the Finance Bill 2022-23.
The main outcomes were as follows:
- Data and cloud computing costs are to be included in the scope of qualifying costs
- Refocusing the reliefs towards innovation in the UK
- Changes to compliance to reduce abuse in the system
HMRC’s main focus of the review was to ensure that the definitions and scope of the reliefs are still up to date and that they are reflecting how R&D activity is conducted. They want to ensure that the reliefs are effective and that they are maximising the value for the UK economy.
Data and cloud computing costs
We are sure that many of our clients will be delighted to hear that HMRC has extended the scope of qualifying costs to include data and cloud computing costs. This modernisation by HMRC is welcomed as it allows for relief to be received for cutting edge R&D.
The following costs will be brought into scope from April 2023:
- Licence payments for datasets that are used for R&D
- Relief will not be claimable if the dataset has lasting value outside of the R&D project
- Staffing costs for creation of datasets
- This will be clarified by HMRC at a later date
- Cloud computing and software
- Costs directly attributable to R&D where there is computation, data processing and analytics which are completed via the cloud.
Refocusing the reliefs towards innovation in the UK
Currently under both schemes claims can be made on R&D activity that is conducted outside of the UK.
The intention is that where companies subcontract R&D activity to a third party, they will only be able to claim relief for work that was performed within the UK. The rules for subcontracting will not change beyond this.
The same will apply for externally provided workers, costs can only be claimed where these workers are paid through a UK payroll.
Companies will still be able to claim R&D tax relief on costs of software, consumables, clinical trial volunteers and cloud computing costs that are purchased overseas. This is because they are still considered to be inputs to UK activity.
HMRC is taking views from stakeholders to see if there should be any exceptions to these rules. However, they would not consider the argument of costs being cheaper overseas.
Abuse and compliance
HMRC’s concern about abuse in the R&D system has increased over the last few years. They estimate that the level of fraud in the scheme equates to £311 million.
In response to this, HMRC has allocated additional resources to compliance, but they are also keen to address the root of the problem by ‘designing out abuse and boundary-pushing, while – so far as possible – limiting the impact on compliant businesses’.
As well as the PAYE caps that are in place for the RDEC and SME schemes, HMRC is proposing additional requirements in the form of more information to be provided around what the expenditure is on and the levels of uncertainty. A senior officer of the company will also have to endorse the claims.
At Richardsons we produce an R&D report which covers the information highlighted by HMRC, as well as being able to give advice to ensure that claims made meet the requirements set out by HMRC.
If you have any queries on any of the points raised above, please get in touch with your usual contact at Richardsons or speak to a member of our R&D team: