Following the review of R&D tax reliefs launched at last year’s Budget, several changes to the scheme were announced.

An updated policy paper confirming these changes and clarifying some others was released on ‘legislation day’ yesterday (20 July 2022).

Qualifying expenditure and overseas activity

The extension of the scope of qualifying expenditure to include datasets and cloud computing; removal of the exclusion of pure mathematics from qualifying expenditure; and new limitations on what overseas work can be claimed for, have been discussed at length.

While modernisation is welcome, the step to disqualify most overseas activity comes as quite a blow to some claimants.

It makes sense – R&D tax relief is a UK government incentive designed to encourage domestic innovation that supports our own economy – but, when you consider known difficulties some sectors are facing accessing talent and skills, it also feels counterproductive in the short term.

Another blow, particularly for SMEs, is the confirmation that notification of R&D pre-claiming will be coming into force from next year.

Claim notifications required

Here are the new anti-abuse measures, also set to come in from April next year:

• All claims to be made digitally (unless exempt from online CT returns)
• Claims to be endorsed by a named senior officer of the company
• Claims to include details of agents or advisors used when compiling the claim
• New claimants (or those who haven’t claimed in the last three accounting periods) must notify HMRC of their intention to make a claim within 6 months of the end of the period to which the claim relates before filing a claim

The pre-claim notification of R&D in particular comes as a shock. While it was tabled at the start of discussions, most claimants and advisors we spoke to had serious doubts about the practicalities of introducing such a requirement.

There are already delays

HMRC has released a number of statements over the last few weeks regards to enhanced compliance checks and the impact on processing times.

The standard 28 days has been extended to 40 days, and there is no indication when this may return to normal.

So, with delays already happening, will even more compliance measures make this worse?

The updated legislation does recognise the extra administrative burden this places on HMRC, and it notes businesses’ experience of dealing with the tax authority may be negatively impacted.

It’s expected those points will be addressed through the Research and Development Communication Forum in due course, but in the meantime, it’d be prudent to get any outstanding claims in as soon as you can, and to review your R&D pipeline for the coming years – especially if you fall into the new, or not recently claimed, category mentioned above.

Other interesting points

New powers for HMRC

The latest amendments also give HMRC more power:

• to recover ‘excessive’ or overpaid credits, from either SME scheme or RDEC scheme claimants
• to remove claims from a CT return if it’s deemed they’ve been made in error without the company being able to reject the correction (the company will still amend its return and make a new claim)

More flexibility for amendments

Companies whose SME claim was deemed incorrect will be given more time to amend the claim to an RDEC one.

PAYE cap and the Health and Social Care Levy

Health and Social Care Levy contributions will be included in the staffing cost calculations that affect the PAYE cap, which limits the amount of R&D tax relief that can be claimed.

Patent Box R&D definitions

The R&D definitions shared by the Patent Box regime will also be extended to include cloud computing and data costs but PB will not be affected by the overseas exclusions new to R&D tax relief claims.

Moving from SME to large company status

Previously, when an SME within a group exceeded the small company thresholds, it would be reclassified as a large company and therefore required to use RDEC, along with all other companies in the group. This has been changed so that other companies in the group can retain their SME status for one year after the other company has transitioned.

Further questions?

We’ll continue to review and comment on the changes made today, but if you have any questions about what these might mean for your future claims, please get in touch.