Changes to R&D Tax Relief laid out…

After a recent consultation on Research and Development (R&D) Tax relief, the Treasury has announced as part of TAM Day, a number of changes to the process. Some of these had previously been included in the recent Autumn Budget speech.

The pre-announced changes included:

• R&D Tax Relief will be restricted to UK based work.
• The relief criteria is also expanding to cover cloud computing and data R&D.

The recent Treasury report confirmed that if a company can’t claim R&D tax reliefs on overseas expenditure, it can still deduct those costs from its taxable profits as usual. Staff must be paid through a UK payroll for their costs to qualify.

The change comes after UK companies claimed tax relief on £47.5 billion of R&D expenditure in 2019 while only carrying out £25.9bn of privately financed R&D in the UK.

Cloud computing and Data

The cloud computing and data elements have been clarified slightly, as follows:

• Licence payments on purchasing datasets for use specifically for an R&D project qualify for the relief but won’t do so if they will be retained for use afterwards.
• Related staff costs for collecting, cleansing and analysing the data will also qualify, if they are particular to the project.

Directly attributable R&D costs, for example around data processing and software costs can be claimed if they are directly attributable to an R&D project. Costs around server capacity or data storage will not be eligible.

Further changes:

Perhaps the more surprising aspects announced though were as follows:

• Claims for R&D Tax reliefs will need to be made digitally.
• They will need to include more detail than previously.
• Claims will need to be signed by a named senior officer of the company.
• Claims will need to include the details of the agent who advised on their preparation.
• HMRC will need to be advised in advance of the claim being submitted that one will be made.

These changes to R&D Tax reliefs are to take effect from April 2023. They’re designed to reduce abuse of the relief system and to encourage innovation within the UK and improve compliance.

Errors and Fraud

The Treasury estimates that error and fraud amounts to 3.6% of the total relief cost, or £311m. There is concern within HMRC that the growth in the number of R&D advisers is creating more ‘spurious’ claims.

The Treasury has said: ‘We have seen a recent emergence of R&D advisers, who are typically not members of professional bodies, cold-calling small & medium enterprises (SMEs), suggesting they could make an R&D claim.

‘These advisers, many with no background in tax, take advantage of customers who are unfamiliar with claiming for R&D, often charging on a commission basis, and submit numerous dubious claims. The commission basis can lead companies to view a claim as cost-free and some are willing to accept questionable claims.’

HMRC plans to increase activity around investigating fraudulent claims in coming months. They’re planning to increase resources looking at R&D tax credit compliance, with the creation of a new team focused on identifying abuse.

The government will publish draft legislation in the summer of 2022, at which point it will ask for views from stakeholders on the detailed implementation of the new measures.

As ever, we’ll keep you up to date on the practical implications of these changes as they become clearer. If you’re considering an R&D tax relief claim for the first time, please don’t be put off! Get in touch and we can explain the existing process and requirements, and help you set things up in the best way for the future.