Reforms to UK’s R&D tax reliefs - Draft guidance published
New guidance from HMRC proposes significant additional information requirements for R&D claimants from 1 April 2023.
Additional information for R&D claims required.
The Government published draft legislation in July 2022 covering significant reform to the UK’s Research and Development (R&D) tax incentives to be effective from 1 April 2023 with the objectives of ensuring that the scheme is modernised, cost effective and compliance improved. HMRC published draft guidance on 20 December 2022 providing further details of how these reforms will work in practice, as well as detailing significant additional information that will be required from claimants going forward to support a claim. With final legislation expected in the Spring Finance Bill 2023, this represents the final opportunity for claimants to provide feedback to HMRC in respect of the reforms. In this article, we consider what these reforms might mean in practice, and the actions that claimants should consider to ensure that future claims are compliant with the additional requirements.
What reforms have been announced?
The key reforms include:
- Restricting relief on expenditure on overseas R&D activities;
- Extending the definition of R&D to include pure mathematics;
- Including data and cloud computing as qualifying expenditure; and
- Introducing additional information and notification requirements.
These reforms are effective for accounting periods beginning on or after 1 April 2023 and apply to all companies under the R&D Expenditure Credit (RDEC) and Small or Medium Enterprise (SME) R&D claims schemes.
Further details of the reforms were discussed in a Tax Matters Digest article published in July 2022.
Overseas R&D activities
Expenditure on overseas R&D activities will generally no longer be qualifying. The exception to the general rule is where conditions necessary for the R&D are not present in the UK, and it would be wholly unreasonable for the claimant to replicate them in the UK. The guidance provides some limited examples illustrating how this may work (e.g. R&D related to volcanoes or tropical diseases not prevalent in the UK), or when legislation or regulations require that the R&D is undertaken in a specific location overseas. The guidance also suggests that HMRC may take a more pragmatic view in instances where the conditions could be replicated in the UK but not within time constraints.
Data licenses and cloud computing services
The guidance provides general exclusions and examples of when data or cloud services will not be qualifying R&D expenditure, including where the company has the right to sell, publish, or communicate the data with a third party.
Practical measures targeting abuse and improving compliance
All companies will be required to submit an Additional Information form before or alongside their claim for accounting periods starting on or after 1 April 2023. Failure to do so will invalidate the claim.
Currently there is no legal requirement to provide additional information to support a claim included in a tax return. Claimants will be required to provide information including agent contact details and a nominated R&D contact at the company responsible for the claim. HMRC are also proposing that technical details of a mandatory minimum number of projects are provided, up to a maximum of 10.
Whilst it has been generally accepted best practice to provide additional information in support of a claim, this requirement is likely to increase the compliance burden upon the vast majority of claimants in the future.
What should claimant companies consider?
Claimant companies should seek to understand the proposed changes, consider the implications on their claims, and review their internal processes to ensure that these are appropriate to capture and document their R&D activities and expenditure for future claims.
If you wish to provide feedback in respect of the draft guidance, or are concerned as to how these reforms might impact on future R&D claims, speak to your KPMG R&D claims advisor. The deadline for responding is 28 February 2023 and KPMG are interested in your feedback and will be responding to HMRC on these proposed changes.
