Background
At the Spring Budget 2021, the government launched a review of the two R&D Tax relief schemes. The government’s objectives for review were primarily to ensure that the UK remains a competitive location for cutting-edge research and that the R&D reliefs continue to be fit for purpose.
Statistics show that despite having such generous R&D reliefs, UK investment into R&D is much lower than the OECD average. The government has concerns that a lot of the R&D for which the incentives are being claimed, is undertaken overseas and therefore not contributing to UK GDP.
There are also concerns that R&D claims submitted may be incorrect and in certain instances, fraudulent. It is estimated that errors and fraud have cost the government in excess of £311m.
In view of the above and following a Consultation that looked at some of the above points, the Government has proposed some changes to the R&D Tax relief schemes. These changes range from allowing for wider range of costs to be claimed and a review of the R&D legislation to consider anomalies/unfairness in the operation of the reliefs, to restricting the reliefs only to activities undertaken in the UK and tightening the compliance rope to prevent abuse of these generous government reliefs.
Summary of proposed changes
The following is a summary of changes currently proposed:
(i) Expanding qualifying costs to include data and cloud costs;
Qualifying cost categories from April 2023 will additionally include the following:
- Licence payments for datasets, to the extent that these are not resold, shared/published or grant any ongoing rights of use beyond the expected term of the R&D project;
- Cloud computing costs attributed to computation, data processing and software. Note that the costs of overheads relating to servers and data storage will still be excluded.
(ii) refocusing support towards innovation in the UK;
Qualifying costs will for the purpose of the tax reliefs will be restricted to activities undertaken in the UK. Certain exclusions will apply, for instance software, consumables sourced from overseas as well as payments made for overseas clinical trial volunteers, will qualify as these are considered inputs to activity in the UK.
(iii) targeting abuse and improving compliance.
Whilst some immediate steps have already been taken such as the recruitment of additional resource at HMRC to review R&D claims, it is recognised that further steps are required to strengthen compliance. For instance, the government intends to introduce a requirement for advance notification to HMRC of the intention to claim. How this will work in practice has yet to be determined, however it is clear that without meeting this criteria, a company will not be able to submit a claim, even if it is undertaking eligible activities.
Other upcoming changes will include:
- a requirement for all claims to be filed digitally, with further detail such as what expenditure the claim covers, the nature of the advance sought, the field of science or technology, the uncertainties overcome etc. Currently, the submission of further detail whilst is suggested by HMRC, is not mandatory, with many companies submitting this only if requested.
- Each claim will need to be endorsed by a named senior officer of the company;
- Claims will also need to include details of any agent who has advised the company on compiling these. Further additional measures are being considered to discourage unscrupulous agents from exploiting the SME scheme and the government is interested in obtaining stakeholder views on this.
(iv) Potential changes to the R&D legislation
The government intends to change legislation for the following:
- allow RDEC claims to be increased where HMRC makes certain types of assessments;
- allow companies to claim RDEC if they had previously incorrectly claimed SME relief on that expenditure;
- clarify that expenditure generally qualifies where payment is made within two years of the end of the accounting period in which the expenditure was incurred.
- amend the time limit for making a claim to two years from the end of the period of account to which they relate, rather than 12 months from the statutory filing date (as it is currently);
- increase the transition period for growing SMEs changing status to large companies, by providing that where an SME within a group becomes large, all companies in the group will retain SME status for one year afterwards.
- amend the rule restricting relief for a company which is not a “going concern” so that it focusses on those that are unviable, rather than those not a going concern because a technical requirement of the accountancy standard has been triggered (for example, by the transfer of a trade).
Many of the above changes will lead to enhanced claims.
Conclusion
The above-proposed changes are being further reviewed to consider how they can be implemented in practice. There may be further changes to both the R&D Tax Relief schemes to ensure that they meet the government’s objectives which include ensuring that the UK remains a competitive location for cutting-edge research and that the R&D reliefs continue to be fit for purpose.
The detailed R&D report setting out the above changes can be found at
https://www.gov.uk/government/publications/rd-tax-reliefs-report