The chancellor’s budget in October 2021 outlined some significant changes to the UK’s R&D tax relief scheme, which we are now able to describe in greater detail.
The new reforms announced are scheduled to take effect from April 2023, and will cover the following three areas:
- Tackle abuse of the scheme and improve compliance
- Expansion of qualifying R&D expenditure to include cloud and data services
- Refocusing R&D support towards innovation in the UK
Tightened rules to improve compliance and tackle R&D scheme abuse
The government has announced a number of measures that it expects will protect the integrity of the R&D tax reliefs scheme, and tackle abuse.
These measures include the following:
- All claims will need to be made digitally.
- Claims will require additional detail on the expenditure it covers, including the nature of the advances being sought, the field of science or technology, and the uncertainties overcome.
- Each claim will need to be endorsed by a Senior Officer of the company claiming.
- Companies will need to inform HMRC in advance of making a claim.
- Claims will need to include details of any Agent that has advised the company on compiling the claim.
- HMRC are allocating further additional resource to tackle error and abuse and will be setting up a new cross-cutting team focused on abuse.
- The Government is considering further measures to discourage unscrupulous agents from exploiting the R&D scheme.
The importance of a robust R&D claimHMRC is continuing to increase its efforts to reduce tax avoidance, tax evasion and abuse of tax credit schemes. This is especially pertinent in the aftermath of repeated COVID-19 lockdowns and the economic cost of the government’s pandemic response.
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R&D for cloud computing and data services
Technology companies, software developers and start-ups stand to benefit significantly from the introduction of Cloud and Data services into qualifying R&D expenditure.
More specifically, the extension of qualifying expenditure includes licence payments for datasets, and cloud computing costs that can be attributed to computation, data processing and software.
Due to the enormous amounts of data analysis, processing, and cloud computing required for many of the latest R&D projects, the government hopes that these additions will sufficiently modernise the R&D tax relief scheme.
Focusing on UK innovation
The announcements also included a commitment for greater emphasis on R&D performed in the UK, so third party labour and subcontract costs will only qualify if they are performed in the UK.
The goal is to help ensure that spillovers from the R&D projects (such as the improved skills gained through research) directly benefit the UK.
In addition, companies who claim for expenditure on EPWs (Externally Provided Workers) will be restricted to EPWs within UK PAYE/NIC.
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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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