TAMD: More details published by HMRC on R&D tax incentives
Big changes are coming to R&D tax incentives from April 2023. Find out what these changes could mean for your future R&D claims.
Big changes are coming to R&D tax incentives from April 2023. Find out what these........
HMRC have provided more details on the forthcoming changes to the research and development (R&D) tax incentives with effect from April 2023. In summary, the changes announced aim to modernise the regime by extending the relief to cloud and computing costs, to refocus the incentives on UK based R&D, to improve compliance by deterring fraud and errors, and finally to resolve some flaws of the current rules.
What are the changes?
Modernisation - Data and cloud computing costs
The proposals are to extend the R&D incentives for acquisition of datasets used in R&D via a licence payment. However, this is restricted to datasets used only for R&D purposes. If the claimant can sell the dataset or if the use/ commercial exploitation of data extends beyond the R&D project then these costs would not be eligible.
In addition, cloud computing costs may be eligible if they directly relate to R&D and this would include the computation, analysis, and processing of data for R&D. However, some large costs linked to servers and storage would be excluded from the R&D incentives claims.
HMRC also clarify that staff costs for employees engaged in the collecting, cleansing and analysis of data for R&D purposes may be included in the claims.
Refocusing R&D Incentives on UK Activities
The proposed changes will severely restrict UK R&D tax incentives for overseas R&D. The key changes proposed are as follows:
- Subcontracted out R&D will only qualify for R&D incentives where the third party undertakes the R&D in the UK;
- Under the research and development expenditure credit (RDEC) regime, 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; and
- Payment to Externally Provided Workers (workers provided by third party staff providers) will only qualify where the workers’ salaries are paid through a UK payroll.
HMRC have asked for feedback on any narrow exceptions potentially to the application of these wide-ranging rules that could severely restrict R&D claims for international groups and all businesses that undertake R&D activities overseas.
Tackling abuse and compliance
In 2019, UK businesses claimed R&D tax relief of £47.5 billion whilst the Office of National Statistics estimates businesses only carried on R&D costing £25.9 billion that was privately financed in the UK by private businesses. Some but not all of this perceived gap may be explained by overseas R&D but clearly HMRC have concerns over the cost driven by spurious or excessive R&D claims. The changes aiming to tackle this are:
- All claims will have to be made digitally;
- Digital claims will require more details to substantiate the claims (unclear precisely what this will mean and in what format);
- Each claim will be endorsed by a named senior officer of the company;
- Companies will need to inform HMRC in advance that they plan to make a claim (unclear if this is at a project or company level, or what the time frames will be); and
- Claims will need to include details of any agent who has advised the company on compiling the claim.
Changes to address anomalies in the R&D Legislation
Several changes are being introduced including ensuring the time limits for R&D claims are two years after the end of the claim period, that companies do not fail the Going Concern test for technical reasons (i.e. there is a transfer of a trade) and that R&D tax relief can be claimed provided the expenditure will be paid within two years of the claim period.
In the Spring Budget, HMRC launched the most comprehensive consultation into the R&D tax incentives for over 10 years covering all aspects of the claims. It is a surprise that following that consultation, to which they received 183 responses, that they have quickly concluded on a small number of significant changes without further detailed consultation on the holistic structure of the regimes. The next steps are that draft legislation will be published in the summer of 2022 and then, following feedback, it will be included in the 2023 Finance Bill and effective from April 2023. This seems a very quick turn-around and perhaps a key driver for the Treasury is to reduce the cost of the regime by appearing to introduce a blanket restriction on R&D undertaken overseas, where subcontracted out or undertaken through Externally Provided Workers.
Data and cloud computing costs
When announced at the Budget, this was a welcome extension of the relief to modernise the R&D regime. The current proposals seem more restrictive than hoped and are narrowly applied to the acquisition of datasets under licence where they are used exclusively for R&D. This is likely to rule out costs of datasets that are used for R&D and commercial purposes or where the dataset is used for R&D exclusively but has a residual commercial value. The definition of cloud computing costs also appears to rule out the costs on servers and storage that can be vital for the R&D activity. It appears the extension is narrower than was hoped for by many claimants.
Refocusing R&D Incentives on UK Activities
In an ever increasingly global business world where UK businesses need to access the best talent wherever that talent lives, this seems a very widely drawn exclusion and will impact international groups and R&D supply chains where the R&D is collaboratively undertaken both in the UK and abroad. HMRC have asked for examples of narrow exclusions (emphasis added) which in itself suggests HMRC are keen to exclude the vast majority of overseas R&D activity even where that relates to UK businesses that may own the Intellectual Property developed and commercialise this for the benefit of the UK economy.
It would have been possible to limit the level of incentives for overseas R&D as a proportion of the UK based R&D to ensure that genuine UK based businesses were able to access some relief for those elements that are related to overseas R&D, however HMRC have applied the widest possible exclusion to significantly reduce the cost of the schemes.
Tackling abuse and compliance
It is clear from the vast increase in the number of R&D claimants and the spiralling costs of the R&D regime over recent years that HMRC and the Treasury are correct to focus on tackling tax avoidance and ensuring compliance is robust. Whilst more details need to be seen, the concern is that compliant R&D claimants are caught in the cross-fire and for companies already subject to a large amount of administration this will add to their burden. It is hoped that the level of documentation and support required is practical and that taxpayers are given ample opportunity to prepare in readiness for any changes to the compliance and submission requirements from April 2023.
Overall, it appears that the forthcoming changes are likely to reduce the level of incentives that may be accessed for overseas R&D, and to make the claim process more robust and likely more time consuming to deter any perceived spurious claimants. There will be a narrow opportunity to review and comment on the draft legislation when introduced in the Summer of 2022 and it is recommended that R&D claimants impacted consider these changes and make any recommendations to HMRC to ensure that the burden does not fall too heavily on compliant R&D claimants. If you are impacted by these changes please do speak to your usual KPMG UK tax contact.