Following on from our blog post back in July 2022, HMRC have posted their draft guidance for the changes coming into effect for accounting periods beginning on 1 April 2023.
HMRC have widely communicated what is going to change but had not previously provided full details for the changes to overseas expenditure and cloud computing costs.
Please see below a summary of the guidance from HMRC.
Subcontractors must be in the UK for it to be qualifying for R&D unless it is qualifying overseas expenditure (QOE). In addition to this, expenditure on payments for externally provided workers (EPWs) must be subject to PAYE and NICs, unless it is QOE.
UK expenditure is defined as being “expenditure which is attributable to relevant R&D undertaken in the UK”. In short, this means the subcontracted business or person must carry out their activities they have been subcontracted to in the UK. Any consumable items and software, data, and cloud services used by the subcontractor must be used in the UK, but they can be sourced from elsewhere.
QOE is expenditure on R&D undertaken outside the UK that falls under the following 3 factors:
- conditions necessary for the R&D are not present in the UK
- conditions are present in the location where the R&D is undertaken
- it would be wholly unreasonable to replicate the conditions in the UK
There may also be legal or regulatory requirements that mean the R&D work can not be completed in the UK. HMRC expect to see clear evidence if this is the case (for example, an email or letter from a regulatory body stating that the work must be done in a certain country).
Data licences and cloud computing services
Data licence and cloud computing services costs can be qualifying expenditure when they are employed in activities which directly contribute to the resolution of scientific or technological uncertainty.
Where these costs are used for multiple purposes within the business, these can be reasonably apportioned. Appropriate apportionments method include staff hours used and number of licences used.
There are some exclusions where the costs cannot be claimed:
- If the business has a contractual right to sell data onward
- If the business has a contractual right to publish, share or otherwise communicate data with a third party, that is not reasonably necessary for, or incidental to, the relevant R&D
- If the costs are Qualifying Indirect Activities
HMRC have also provided further information on what will need to be included in a claim notification, and what additional information will need to be communicated to HMRC when submitting your R&D claim.
You will need to supply a claim notification to HMRC if you are:
- a first time R&D claimant or
- an R&D claimant who has not made a claim in any of the previous 3 calendar years
There is a time limit for a claim notification to be submitted to HMRC, starting from the first day of the accounting period to which the claim relates to and ending 6 months after the relevant accounting period.
For example, if your accounting year end runs from 1 April 2023 to 31 March 2024, you would be able to submit your claim notification from 1 April 2023 until 30 September 2024.
You will not need to submit a notification if a return is submitted before the 6 months after the end of an accounting period.
HMRC are releasing a “Claim Notification” form in April 2023 on GOV.UK. The information that is required on the form includes details about the company and
From previous correspondence, we are anticipating that the form will need to be submitted online although HMRC have not made it clear on their guidance whether that is still applicable.
Additional information required
There will also be a new form for the additional information required, which again can be accessed on GOV.UK from April 2023. This will need to be submitted either before or at the same time as the claim is made.
The key information that will need to be provided is as follows:
- The company’s tax reference numbers
- Contact details of the main internal R&D contact at the company
- Agent details
- The amount of R&D that is qualifying indirect activities
- The descriptions of the projects covering at least 50% of your expenditure
At Richardsons, we already produce an R&D report covering the additional information that HMRC is asking for whenever we submit a claim. Therefore, this should not create much more work if you are already an R&D client with us.
More detail on all the above can be found on the following link: https://www.gov.uk/government/consultations/draft-guidance-research-and-development-rd-tax-reliefs/research-and-development-rd-tax-reliefs-draft-guidance
Changes to R&D rates
Although not included in the draft guidance, it was announced by the Government in the Autumn Statement that the rates for claiming R&D relief will be changing from April 2023.
For expenditure on or after 1 April 2023, the RDEC rate will increase from 13% to 20%, the SME additional deduction will decrease from 130% to 86%, and the SME credit rate will decrease from 14.5% to 10%.
This means that for a loss-making company the benefit from the SME scheme has dropped from 33% to 18% and the benefit from the RDEC scheme has increased from 10% to 16%.
This is a significant change, and this may lead to a difference in the amount of the R&D repayment you receive. It also means that, from a purely cash benefit point of view, grant funded R&D will be more favourable than self-funded work.
If you would like to discuss potential ways forward to maximise your R&D claim whilst complying with HMRC, please get in touch with your usual contact at Richardsons or speak to a member of our R&D team.