The government has announced that new claim notification and additional information requirements will now be enforced from 8 August 2023, not 1 August 2023 as originally planned.
Changes announced in the Spring Budget to the R&D tax relief scheme are now in place, with some having taken effect from the 1 April 2023, this is a practical guide to what you need to know and do to ensure you remain compliant with HMRC and their much stricter approach to claiming R&D tax relief.
Changes to Rates and ReliefsFrom 1 April 2023, qualifying R&D expenditure has been extended to include the costs of data licensing and cloud computing costs. You will need to demonstrate how these costs have been used in R&D projects, excluding any commercial elements, for example if the data bought was then used in a wider commercial contract, you would need to apportion costs between the data used for R&D purposes and for commercial benefit. The rates of R&D relief have been reduced though from 1 April 2023, with the enhanced R&D relief reduced from 130% to 86% and the tax credit for loss making companies reduced from 14.5% to 10%, unless you are an R&D intensive company (defined as having 40% or more total company expenditure spent on R&D) in which case you can still claim at 14.5%. |
Reporting requirements
If you have not previously claimed R&D, or if you have not made a claim in the previous 3 accounting periods, then you will need to pre-notify HMRC of your intention to make a claim and no later than 6 months from the end of the accounting period in question.
If the pre-notification form is submitted after the 6 months deadline, the claim will be rejected. The form must be submitted online via the Gov.UK gateway and you must include information about the R&D projects you intend to claim for.
There is now also a requirement to submit an “additional information” digital form for any R&D claims submitted on or after 8 August 2023.
What information is needed?
The “additional information” form is similar to most Gov.UK forms and has to be submitted via the Gov.UK portal. It asks for the usual information about the company’s identity and tax reference numbers and also requires a Senior Officer at the company to sign off the R&D claim, with their details entered on the form as well as details of any Agent that you may have used to help you prepare the R&D claim.
Qualifying R&D Costs
Qualifying R&D costs remain broadly similar to how they were before, and can be summarised by the following:
- Employee costs
- Gross Salaries
- Employers NI
- Employer Pension Contributions
- Bonuses
- Externally Provided Workers (Agency staff)
- Subcontractors
- Consumable materials/energy costs
- Software
- Data licenses
- Cloud computing costs.
However, if you have 2 or more projects, you will need to allocate R&D costs per project. You will need to ensure you have reliable records for each project.
Ideally, for any employees you have working on R&D projects, you will need to record their individual time per project, as HMRC may ask for this if they did enquire into the claim.
Project information
HMRC’s questions will be similar to the ones you currently need to report on. These questions are:
1. What is the main field of science or technology?This may be linked to your SIC code, but it is important to identify and provide a brief description of the field on which the project is based.
2. What was the baseline level of science or technology that you planned to advance?Describe the level of knowledge or capability that existed which the company intended to advance, such as:
- improve an existing material or device - what were its existing features and capabilities?
- develop new knowledge in a particular area of science or technology - what was already known?
In layman’s terms, you need to be able to describe the state of the technology at the start of the project and its capabilities (or lack of) that you are attempting to advance. This should also include details of the research undertaken to establish the baseline and any other industry experts you have spoken to, to gauge that what you are attempting to achieve was not thought possible or “readily deducible”.
3. What advance in that scientific or technical knowledge did you aim to achieve?Provide a description of the advance using the baseline level of science or technology in the previous answer as a reference.
Remember, this has to be an overall advance in that field of science or technology and not just a company advancing its own knowledge.
4. What scientific or technological uncertainties did you face?You can only include scientific or technological uncertainties, for example, if the company:
- does not know if it is possible to create or improve the product or process.
- cannot readily deduce how to create or improve the product or process.
Your description of the uncertainties should explain:
- what is stopping you from achieving the advance in scientific or technological knowledge?
- why is it a technological or scientific uncertainty for the industry, not just your company?
- if a competent professional working in the field would be uncertain as to how to achieve the advance, explain why
This is another key area of focus from HMRC. These need to be uncertainties that are not “readily deducible” to a competent professional and in HMRC’s current view, more than just “challenges and complexities”.
The key here is to be able to explain the research done to establish what existed in the public domain and the technical uncertainties this identified at the technical feasibility stage of the project, plus any new ones discovered as the project progressed.
5. How did your project seek to overcome these uncertainties?You must provide details on the R&D activities that directly contributed to resolving the scientific or technological uncertainties, as well as qualifying indirect activities. This must show:
- how the R&D project was not straightforward
- the methods planned or used to overcome the uncertainty
- if the uncertainties were resolved. If yes how, and if no, why not?
Here you must describe all the project activities that have attempted to overcome the uncertainties and advance knowledge.
Summary of actionsOur advice is to prepare now by ensuring you have adequate records for each R&D project you undertake. The best practice would be to make sure you:
If you are unsure or lack the systems in place to do this, then please talk to the Radius team at Shorts and we can work with you to help find a practical solution. |
Darryl Hoy
Darryl is the Technical Director of the Radius team. He is a specialist in Research & Development tax reliefs, having previously worked at HMRC as an R&D Tax Inspector.
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