R&D Legislation Changes
HMRC have now outlined their proposed changes to the R&D scheme as part of the draft legislation published by HMRC on L-Day (20 July 2022).
HMRC have stated that their primary aims with the reforms are to:
- Expand the scope of qualifying expenditure (to further support cutting edge R&D)
- Refocus the reliefs towards innovation in the UK
- Tackle abuse of the R&D scheme
All the proposed reforms will come into effect for accounting periods starting on or after 1st April 2023.
With the UK’s two R&D schemes quickly becoming some of the country’s most successful Corporate Tax Incentives, HMRC continue to focus on evolving the scheme to ensure it remains competitive in a global market, beneficial for the UK economy and secure against abuse and misuse.
Extending qualifying expenditure
HMRC have announced that they will be expanding the scope of qualifying expenditure to encompass the cost of acquiring datasets and cloud computing costs.
It is therefore our understanding that this will include a wide variety of new costs for software-based R&D, potentially, most importantly the ever-increasing cost of hosting and on-demand cloud computing platforms, such as Amazon Web Services (AWS).
HMRC have stated that it is their belief that this change will further support cutting edge R&D to be undertaken in the UK.
It was also announced that going forwards any R&D into areas of pure mathematics will be allowable, these have previously been excluded by HMRC, but this exclusion will now be removed.
Refocusing the reliefs towards innovation in the UK
The Government have been quite vocal on their intent to refocus the ‘run off’ benefits of R&D back into the UK. They have taken a significant step in achieving this by limiting Externally Provided Worker (EPW) costs to only included EPWs paid via a UK payroll, this will affect both the SME and RDEC R&D scheme.
A similar restriction has been imposed for allowable subcontractors and contributions to independent research. Going forward these activities will only be allowable, where they are undertaken in the UK.
There are certain narrow exceptions, where the subcontracted R&D can be undertaken outside of the UK. However, these will be limited to situations where there are factors that are not present in the UK, “such as geography, environment, population or other conditions that are not present in the UK are required for research”, examples given include, ocean research and clinical trials. HMRC goes on to state the this is not an exhaustive list but states that “exemptions will not include cost, or workforce availability”.
Tackling abuse and improving compliance
This has been a key focus of HMRC over the past year and the industry has seen a dramatic increase in compliance notices being issued by HMRC. It is therefore not surprising to see HMRC adjusting the legislation to improve compliance by taxpayers and their agents.
These changes include the requirement for all R&D claims to be made digitally (exempt for those companies exempt from the requirement to deliver a Company Tax Return online). These digital submissions will require a breakdown of costs by qualifying category and a brief description of the R&D activities undertaken. Each R&D submission will also have to be endorsed by a named senior officer of the company and if an agent was used, their details will also need to be supplied.
HMRC will also require companies to pre-notify their intent to make an R&D claim, within 6 months of the end of the relevant accounting period. However, if the company has made an R&D claim in any of the three preceding periods they will be ‘grandfathered’ in and will not need to pre-notify HMRC.
Addressing anomalies and unforeseen consequences
HMRC have also announced several additional measures to address anomalies and unforeseen consequences, thereby ensuring that the R&D scheme continues to operate as intended. The most notable of which allows for the new employer’s health and social care levy, to be treated in line with national insurance contributions and therefore allowable under the R&D scheme.
In summary the following will come into effect for all accounting periods starting on or after 1st April 2023:
- Eligible expenditure will include cloud computing costs
- Pure maths will be an allowable area of R&D
- Only EPWs on UK payroll will be allowable
- Subcontracted R&D will be limited to work undertaken in the UK – with some narrow exceptions
- Payments to Qualifying Bodies (e.g. universities or health bodies) to undertake independent research will only qualify if the activities are undertaken in the UK
- R&D claims will need to be made digitally going forward – exempt for those companies exempt from the requirement to deliver a Company Tax Return online
- R&D submissions will need to include
- A breakdown of costs across the qualifying categories
- A brief description of the R&D activities
- An endorsement from a named senior officer of the company
- Details of any R&D agent who has advised on the claim
If you have any questions regarding the upcoming changes, please contact us on:
(E)firstname.lastname@example.org or (T) 01908 219100 (W) advaloremgroup.uk