Claiming R&D tax relief in a changing landscape
Tax Reliefs including R&D
With HMRC having recently released draft legislation on R&D tax relief and tax rates set to increase in the near future, Sara Andrews discusses what claiming the relief will look like in 2023.
Just before Christmas, HMRC released the draft legislation for Research and Development Tax Relief (R&D). There’s been a lot of noise surrounding the changes, which are due to be implemented as of April this year and will effect accounting periods starting on or after 1 April 2023.
And now, as businesses are back up and running and ready to face the new year ahead, it’s good to see that we have some further clarification on what we can expect regarding the relief going forward.
Even though this is still draft legislation and HMRC have called for comments, it’s crucial to stay informed of the changes and what you should be looking out for before claiming.
With this in mind, we’ve summarised some of the key points from the draft legislation below and how your claims could be impacted going forward...
Claiming for overseas expenditure?
It’s good to see that much more detail has been released with regards to overseas expenditure, as this is one area in which we’re set to see some of the biggest impacts to the regime.
Unless certain qualifying conditions are met, expenditure for overseas subcontractors or agency workers will no longer qualify for R&D tax relief.
This will go a long way in helping to refocus innovation back to the UK. However, if you’re claiming subcontractor costs which relate to activities undertaken (by said subcontractor) within the UK for a UK-based R&D project or if all three of the conditions for qualifying overseas expenditure are met, your costs may still qualify.
These conditions include:
- If the necessary conditions for your R&D activities aren’t present in the UK. This could be for legal, social or geographical reasons. One example being deep sea research;
- If the conditions are present in the location where your R&D activity is being conducted;
- If it’s wholly unreasonable for these conditions for R&D to be replicated within the UK. For instance, if you’re conducting tests abroad which could take place in the UK, this would not qualify as R&D expenditure going forward.
What about the additional costs?
It’s good to see that data and cloud computing costs will qualify for relief for accounting periods on/after 1 April 2023.
If you are using data or cloud for purposes other than R&D, make sure you keep robust records to show how you’re using the licenses. There are some general exclusions to this, such as:
- Costs that your business is able to recoup. So if you have have a contractual right to sell the data (i.e. you’re incurring costs for the data but are then selling it on) you won’t qualify for the relief;
- If you have a contractual right to communicate the data with third parties, such as publications;
- If you’re operating your own cloud data services, set up costs won’t qualify for relief, but costs in operating the facilities might.
You will also need to ask yourself, are you obtaining a license over data or obtaining the data itself? As the data will be considered as capital, not revenue and won’t be eligible for relief.
Pure mathematics will also qualify, but HMRC still haven’t provided much information on the details as of yet, which is disappointing given that the implementation date is now fast approaching.
Additional information required
If you’re claiming relief, you’ll have to fill out an ‘additional information’ form with/before you submit your claim. We still haven’t seen a template for the additional information forms and we will be seeking clarity from HMRC on whether the new forms will replace the reports which they have historically requested.
So far we know that these forms will outline more details relating to your project, the costs, the team involved in the project and the agent who supported you throughout the claim process. The latter of which will further help HMRC in their bid to clamp down on fraud and improper claims, which will go a long way in safeguarding R&D tax relief going forward.
If you’re claiming for larger projects, your business will also need to disclose everything from the field of science and technology and the baseline level of science or technology you hope to advance, to the uncertainties you’ve faced and how you have planned to overcome them.
You will also need to take the number of projects being disclosed within the report into consideration, as well as the level of expenditure associated with each project.
You can rest assured that if you work with our incentives and reliefs team, our reports already cover the level of detail that HMRC is now asking for. But if you use other advisors, you’ll need to make sure that they have the capacity to capture all of the relevant details going forward.
A new pre-notification requirement
Finally, if you haven’t claimed R&D relief before or if you haven’t claimed in the last three calendar years, you will need to notify HMRC of your intention to claim within six months of the end of the accounting period wherein the R&D took place.
In order to do so, you’ll need to submit details about your business and the advisor who will be supporting you with your claim via a ‘Claim Notification’ form, in similar sense to the additional information form we mentioned above.
Other changes to come…
Outside of the draft legislation, there are more changes to the tax landscape to come, which could have a knock on effect on your claim.
Whilst the Research and Development Expenditure Credit (“RDEC”) rate will increase from 13% to 20% for expenditure incurred on and after 1 April 2023, SMEs will face a huge reduction in their R&D tax relief for their expenditure. The enhanced deduction will reduced from 130% to 86% and the tax credit rate will drop from 14.5% to 10% from the same date.
With the increase in the corporation tax rate to 25% as of 1 April, the tangible impact of this change may be as little as 3.2% for some SMEs. But, for businesses relying upon the relief during these uncertain times, this change could be a big blow.
With this in mind, we would always recommend consulting a qualified advisor who fully understands the legislative changes and will be able to help maximise the value of your claim.
Supporting you with R&D
If you think that the draft legislation could have an impact on your R&D claims, it’s best to start planning ahead now to minimise any potential repercussions that could be on the horizon.
As a team of chartered tax advisors, industry experts and ex-HMRC inspectors, our incentives and reliefs team understand the legislation in and out. They’re on hand to answer your queries about the changes and support you through your entire claim, and support with R&D planning advice.