General description of the measure
Following the review of R&D tax reliefs launched at Budget 2021, the government announced the following measures, which will apply for accounting periods beginning on or after 1 April 2023.
The government has an ambitious target to raise total investment in research and development to 2.4% of UK GDP by 2027. R&D tax reliefs have a key role in incentivising this investment by reducing the costs of innovation. It is therefore important to ensure that the reliefs remain up-to-date, competitive and well-targeted. A brief, high-level statement of the policy rationale for this measure.
Extending qualifying expenditure
To incentivise R&D using modern computational approaches, the government is extending the scope of qualifying expenditures to include the costs of datasets and of cloud computing.
To further support cutting edge R&D, the government will make changes to the definition of R&D for the tax reliefs, to remove the exclusion of pure mathematics.
Refocusing the reliefs towards innovation in the UK
To ensure the maximum benefit to the UK from the spillovers of R&D activity incentivised by the reliefs, relief for subcontracted work and the cost of externally provided workers will be limited to focus it on UK activity. There will be some narrow exemptions where factors such as geography, environment, population or other conditions that are not present in the UK are required for research (for example, deep ocean research) and where there are regulatory or other legal requirements for certain activities to take place in specific territories (for example, clinical trials). The exemptions will not include cost, or workforce availability.
Tackling abuse and improving compliance
To tackle abuse of the reliefs, all claims to the R&D reliefs — either for a deduction or a tax credit — will in future have to be made digitally (except from those companies exempt from the requirement to deliver a Company Tax Return online)
These digital claims will have to break the costs down across qualifying categories and provide a brief description of the R&D. Each claim will need to be endorsed by a named senior officer of the company.
Companies will need to inform HMRC, in advance, that they plan to make a claim. They will need to do this, using a digital service, within 6 months of the end of the period to which the claim relates. Companies that have claimed in one of the preceding three periods will not need to pre-notify.
Claims will need to include details of any agent who has advised the company on compiling the claim.
Previously announced measures to address anomalies and unforeseen consequences
A number of changes will be made to correct anomalies and ensure the reliefs operate as intended. These include:
- allowing companies to make or increase a claim for RDEC where HMRC makes certain types of assessment, as allowed by paragraphs 61 to 65 of Schedule 18 Finance Act 1998
- allowing companies to claim RDEC instead where they had previously erroneously claimed SME relief and the time limit for amending claims has expired
- clarifying that expenditure generally qualifies where a payment is made within two years of the end of the accounting period in which the expenditure was incurred
- amending the time limit for making a claim to two years from the end of the period of account to which they relate. This will prevent companies which do not receive a notice to file, either because they fail to register or notify HMRC that they are dormant, from benefiting by having more time to make a claim
- supporting businesses growing and transitioning from the SME scheme to RDEC, by providing that where an SME within a group exceeds the size thresholds for an SME, all companies in the group will retain SME status for one year afterwards — under current legislation, while the company itself retains its status, other companies in the same group lose their SME status straight away
- amending the rule preventing relief for a company which is not a “going concern” so that where a company ceases to be going concern solely because of the transfer of a trade, and is otherwise viable, it may still claim
- expanding the scope of rules in the Self Assessment legislation so that they can be used to recover overpaid SME payable tax credit and RDEC to allow HMRC to recover such amounts where the taxpayer made a mistake despite taking reasonable care
Further consequential measures
The following further changes are being made to ensure the reliefs operate as intended:
- the level of National Insurance contributions made by a company on its employees’ and its own behalf feeds into the calculation of a company’s staffing costs, and potentially its payable credit cap, and so affects the amount of any R&D reliefs that it can claim. As the Health and Social Care Levy represents a new cost, sections of the R&D rules that currently refer only to ‘National Insurance contributions’ will be amended to also refer to the Health and Social Care Levy
- the Patent Box regime uses R&D definitions of qualifying expenditure as part of its calculations — as this package of R&D changes expands the categories of qualifying expenditure to include data and cloud computing costs, the relevant sections of the Patent Box rules require consequential amendment
Background to the measure
Following the consultation, at Autumn Budget 2021, the government announced reforms to R&D tax reliefs and published a report in November 2021 setting out detail on a series of initial measures to reform the R&D tax relief system. These measures included the expansion of qualifying expenditures to cover data and some cloud computing costs, refocusing R&D relief on activity carried out in the UK and a package of measures to target abuse and improve compliance.
Following stakeholder feedback, Spring Statement 2022 announced further detail on these measures.
Recognising that there are cases where it is necessary to undertake R&D outside of the UK, the government announced that overseas subcontracted expenditure and the costs of overseas externally provided workers 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, meaning expenditure must take place outside of the UK — 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 intends to include all cloud costs incurred directly for R&D in the scope of qualifying expenditure.
The government recognises the growing volume of R&D being undertaken which is underpinned by mathematics. To support this work, the definition of R&D for tax reliefs will be expanded to include all mathematics — clarifying in particular that ‘pure maths’ can qualify.
Source – HMRC
For further information and guidance on Research & Development Tax Relief, through either the Research & Development Expenditure Credit (RDEC) or the small or medium enterprises (SME) R&D relief contact us here at Friend Partnership.
Friend Partnership is a forward-thinking firm of accountants, business advisers, corporate finance and tax specialists. We act for entrepreneurial businesses and successful individuals on a national & international basis.