Well things certainly don’t stand still when it comes to government policy around R&D. Back in July we updated you on forthcoming changes that were proposed changes to R&D regime.
That update looked at the three sets of changes that were due from 1 April 2023, however the precise details of the measures were still being debated and consultation being carried out in relation to:
- Disallowance of overseas costs such as non-UK agency workers or subcontractors; except for certain reasons;
- New measures to combat abuse including advance notification, naming your adviser, company accountability and providing greater detail regarding R&D projects; and
- Inclusion of data and cloud computing costs.
Draft legislation has now been published. It clarifies the timing of when these measures will take effect. And provides further detail of what will and will not be acceptable reasons for including overseas costs.
Impact on allowable costs and advance notification
The timing point is key. During the consultation period, we were told that the new measures would take effect from 1 April 2023. However, on reading the legislation, we are now clear that they will take effect for accounting periods beginning on or after 1 April 2023. This means that if you have a financial period ending 31 March, the first period that the changes will apply to is 31 March 2024. Whereas, if you have a financial period ending 31 December, the first period of change will be 31 December 2024.
Applying the December period end example, this means that overseas costs will continue to be available to claim up until 31 December 2023, with the restrictions applying from 1 January 2024. In contrast, using the same example, data and cloud costs will be outside the scope of the regime for companies with a December year end until 1 January 2024.
This clarification provides greater visibility and opportunity for businesses to forecast how the changes will affect them, with potential opportunities for forward planning to mitigate their effects.
The timing of the advance notification requirement has now become clearer with the publication of the draft legislation. The advance notification rule means that ‘first time R&D claimants’ (companies who have not made a claim in the prior three years) will need to provide HMRC with advance notice that they wish to make a claim. The advance notice needs to be made within six months of the financial period end.
The first period to which this will become relevant is 31 March 2024, with companies with a 31 March 2024 financial year end thereby required to give notice before 30 September 2024. Companies with a later year end such as June or December will need to give notice six months after their June 2024 or December 2024 year end respectively. HMRC have not communicated how this advance notification should be given, but it is expected to be required electronically using a purpose built HMRC portal.
It is worth noting that first time claimants are deemed by HMRC to be higher risk, with their claims likely to attract greater scrutiny. Therefore, this advance notification system provides a method of ‘flagging’ these newer claimants. It also means that new claimants will have a drastically reduced window of six months rather than the normal two-year period to inform HMRC of a claim. As a result, any businesses embarking on R&D projects for the first time or start-up R&D companies will need to make sure they speak to an R&D adviser as soon as possible to ensure they do not miss out on valuable reliefs.
Overseas costs – further clarification on exceptions
As mentioned above, for financial periods commencing after 1 April 2023, R&D relief for subcontractors or external workers will only be available where their activities take place in the UK. Some exceptions have been provided to this rule. These (somewhat reasonably) include where it would be impossible for the activities to take place in the UK, due to geography, environment, population or other conditions which are not present in the UK. Legal or regulatory requirements may also be valid. Examples have been provided of acceptable exceptions, including deep sea divers or overseas clinical trials. One point that has been specifically clarified in the legislation is that cost or workforce availability alone will not be accepted as reasons to include overseas costs.
The ‘refocussing’ of the R&D relief on the UK is intended to promote UK only ‘spill over’ benefits of R&D such as upskilling workforces and providing improved job opportunities. However, it may be debatable whether UK businesses will change their resourcing habits if in reality they cannot afford or obtain the necessary resource in the UK.
If you would like to discuss how the changes will impact your claim, and discuss any advance planning opportunities, please feel free to contact [email protected]