Several important changes are happening to research and development (R&D) tax reliefs in April 2023, which could affect what income qualifies for R&D tax relief that businesses need to account for in their plans.
These new measures are still being considered by Parliament, but details of the upcoming amendments to the R&D tax relief system have now been published.
Overseas outsourced R&D
Under the new rules, the costs of overseas workers will not qualify for UK R&D relief, where costs are incurred after April 2023.
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.
The Government will, therefore, legislate so that expenditure on overseas R&D activities can still qualify where there are:
• Material factors such as geography, environment, population or other conditions that are not present in the UK and are required for the research – for example, deep-ocean research
• Regulatory or other legal requirements that activities must take place outside of the UK – for example, clinical trials
The Government also needs to consider the international structures and connections of businesses carrying out R&D.
If a blanket ban was imposed, UK groups with overseas subsidiaries conducting work on a UK project may not be able to make a claim, despite the innovation still benefiting the main UK parent company.
Cloud computing and data
Businesses have been unable to claim for the costs of cloud computing and data use. This has hampered some of the UK’s most innovative tech companies by excluding them from the tax benefits of the R&D credit scheme.
Under the Bill, businesses will be able to include the costs of purchasing data for R&D projects or using cloud computing services.
However, HM Revenue & Customs (HMRC) is still expected to provide clarity on the issues of usage and residual values in its upcoming guidance.
Amongst the other issues to consider is identifying cloud costs that relate to an R&D project. Many businesses use the same cloud services throughout their operations, so apportioning specific costs to R&D may be challenging.
Other qualifying costs for cloud computing costs may also be an issue, as it has been revealed that the costs of ‘data storage’ will not be allowed. Again, further clarity on what these rules cover should be provided in HMRC’s guidance later this year.
There has been growing concern that the R&D tax relief system is open to abuse and so the new measures will include compliance procedures to deter speculative or fraudulent claims. This will include:
• An entirely digital claims system
• Additional details to be submitted with all claims
• Requirements for a named senior officer of the company to endorse each claim
• Companies made to notify HMRC, in advance, of their intentions to submit a claim
• Details of any agent who has advised the company on compiling the claim.
HMRC will also be given new powers and enforcement action to tackle R&D tax advisers. It is thought that alongside these measures, HMRC will invest further resources into conducting additional risk profiling and scrutiny of R&D tax relief claims.
During his Spring Statement, the Chancellor alluded to the fact that he planned to introduce further changes to the R&D tax relief system in future to improve access to the support that it offers.
Within the Statement’s accompanying documents, the Treasury says that the steps it hopes to take could support an additional £5 billion of R&D funding by 2024.
One of these steps has already been revealed with the expansion and clarification of qualifying expenditure to include pure mathematics services.
Further details about reforms to the R&D tax credit system are expected later in the year, nearer to the Autumn Budget.
The Government has said that, Where required, legislation will be published in draft before being included in a future Finance Bill to come into effect in April 2023.