R&D Draft Guidance from HMRC (December 2022)

HMRC issued its draft guidance on the proposed legislative changes to R&D Tax Reliefs on 20 December 2022. Final legislation will be included in the Finance Bill in Spring 2023, whilst the draft guidance remains part of open consultation.

Firming up the original draft guidance from July 2022, these changes will all come into effect for accounting periods beginning on or after 1 April 2023.

The main headlines are;

Overseas R&D Expenditure

R&D expenditure contracted out to subcontractors or externally provided workers (EPW) is required to be UK expenditure, undertaken in the UK for an R&D project actually taking place in the UK.

Consumable items used by the subcontractor/EPW will also need to be used up in the UK (although these can be sourced elsewhere).

For the R&D costs to be qualifying overseas expenditure, they must meet all 3 particular factors;

1. That the conditions necessary for the R&D are not present in the UK

2. That the conditions are present in the location where the R&D is undertaken

3. That it would be wholly unreasonable to replicate the conditions in the UK.

These factors are described in more detail in the government's Research and Development (R&D) tax reliefs - draft guidance document.

Data licenses and cloud computing services

Data licensing and cloud computing service costs, which are directly employed in the R&D project and as part of resolving the scientific or technological uncertainty of the project, will now be qualifying R&D expenditure.

There are some general exclusions here, mainly around acquiring data for the R&D project that is then sold to customers as part of a commercial product. This is more likely to be an issue in data analytical or aggregation businesses, although it should also be possible to apportion costs where the data is used for multiple purposes across the business.

R&D tax relief claim notifications

For accounting periods beginning on or after 1 April 2023, any first-time R&D claimants, or R&D claimants who have not made any R&D claims in the 3 previous calendar years, will need to submit a claim notification to HMRC within 6 months after the end of the relevant accounting period.

If you actually submit the claim within 6 months, then you will not need to submit the claim notification. You can find all information that needs to be included in the Government's draft guidance.

Additional information for the R&D tax relief claim

As part of the plans to make the inclusion of information on the claim mandatory, you will now need to submit an online “Additional information” form.

Along with tax reference numbers, including your Corporation Tax reference, PAYE, and VAT numbers, you will also need to include details of the following;

• The main R&D contact at your company, who is responsible for the claim

• The type of business you are

• Contact details of any agent/advisor who helped you with the R&D claim

• A breakdown of the qualifying R&D expenditure

• The number of R&D projects

• Descriptions of these R&D projects - the level of detail required depends on the number of projects involved:

  • If there are 1-3 projects, you must describe all of them

  • If there are 4-10, you must describe enough to cover 50% of the R&D costs

  • If there are 10+, you must describe a minimum of 3 and cover at least 50% of the R&D costs

The required descriptions are categorised as follows:

1. The main field of science or technology

2. The baseline level of the science or technology you planned to advance

3. What advance you aimed to achieve

4. What scientific or technological uncertainties you have faced

5. How the project(s) sought to overcome these uncertainties

PAYE references for companies supplying Externally Provided Workers

An important piece of information relating to the use of Externally Provided Workers is that you must now include the PAYE reference of the company they were supplied from. This is to ensure they satisfy the “subject to PAYE and NI” testing criteria.

Seeking advice on R&D Draft Guidance

Whilst much of this is similar to the information that will already be included in any claims submitted by the Radius Team, we recommend making sure you are keeping adequate records for each R&D project undertaken right now.

If you have any questions on what records are needed, or are seeking any other advice relating to HMRC's R&D Draft Guidance, we recommend speaking to our team today.