You may already have heard about the future changes in the R&D regime. As a reminder, the three main areas are:
- The inclusion of Data and Cloud Computing costs, modernising the eligible cost categories, to fit with today’s R&D activities.
- Disallowance of overseas costs, such as non-UK consultants or agency workers
- New measures to require further information and accountabilities when submitting a claim to combat perceived abuse of the regime.
The changes take place from 1 April 2023, however the precise details of the measures are still being debated. Draft legislation was published on 20 July however further consultation has been invited so we still await the firm details of what the above changes will bring.
Data & Cloud computing
The Government have expanded on the cloud and data cost categories that may be included from next year, confirming that it intends to allow all cloud costs associated with R&D. This will allow companies to claim for costs relating to the storage of data, supporting data-heavy research projects. This logical and welcome amendment came about following contributions from Cooper Parry’s specialist R&D team and other stakeholders into recent Government consultations.
Inclusion of Pure Mathematics
On a similar theme, there has been a recognition that developmental areas such as Artificial Intelligence, quantum computing and robotics are growingly underpinned by pure mathematics. Pure mathematics has previously been specifically disallowed as a qualifying research activity. However, in recognition of the fact the UK currently has a comparative advantage in these sectors, and to encourage future growth, pure mathematics will be included as a qualifying cost from April 2023.
Restrictions to overseas costs
As part of the target to increase overall UK R&D spend, with a belief that this will contribute to improved productivity and growth and ultimately greater living standards in the UK, restrictions on overseas expenditure are proposed. These restrictions are designed to dis-incentivise expenditure on resource obtained from outside the UK, on the grounds that some of the benefits of R&D (such as upskilling the workforce) tend to remain with the location where the R&D takes place rather than benefit the UK economy. As such, the changes will deny R&D relief for subcontractors where their activities are carried on outside the UK, or for agency workers only where they are not taxed under UK PAYE.
As noted in our previous articles, and as put forward to the Treasury during the consultation period, we believe that exceptions should be made to allow overseas costs where they are necessary to further the R&D and could not be accessed from within the UK.
We are pleased to report following this, there has been a slight relaxation to allow vital R&D carried out overseas to be allowed where there is a material or regulatory requirement for activities to be carried out in other jurisdictions. As part of the draft legislation, HMRC have clarified that the exception to allow overseas workers will not permit the lack of availability in the UK or cost to be valid reasons.
As confirmed by the clarification in the draft legislation, this relaxation is very limited, and each scenario would need to be judged on its merits. Material factors which would be permitted must be geographically or environmentally driven. As an example, a scenario that may be acceptable is deep ocean research, which could logically only take place outside the UK. Again, the regulatory and legal exceptions are tight, with examples including activities such as clinical trials, which are required to take place at a specific location outside the UK.
Tackling R&D abuse
Various measures have been suggested, such as advance notification of the submission of a claim by a company. Companies which have not claimed R&D tax relief in any of the previous three accounting periods will be required to pre-notify HMRC of their intention to claim. This notification must be given no more than 6 months from the end of the accounting period for which the claim relates.
Further proposed changes include accountability by a senior member of the company, as well as a requirement for more supporting data to be provided when a claim is submitted.
Whilst again, draft legislation has recently been published, consultation has been invited and we therefore await the final details before the proposed changes are expected to apply from 1 April 2023.
The supporting data requirement will necessitate the provision of the objectives of the R&D projects and the scientific or technological challenges faced, together with greater analysis of the financial composition of the claims. The Cooper Parry R&D team already provide and incorporate detail on these areas, as part of the report, so we do not expect this to increase the administrative burden for our clients.
We certainly expect increased scrutiny of claims following HMRC’s announcement that they have created a specific taskforce to review claims. We have already seen evidence of this, in the number of enquiries rising, and a slow-down of processing of R&D credits, explained by HMRC to be due to a review of ‘irregular’ and potentially fraudulent claims.
With the new compliance requirements coming, coupled with the increased vigilance from HMRC, having a competent and experienced R&D adviser by your side becomes even more important to ensure your future claims are robust.
Further detail of the new rules will become available later this year. 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]