Reports: R&D tax relief scheme changes update: data, compliance, and overseas activity
Back in the March 2021 Spring Budget, Rishi Sunak announced a consultation of the R&D tax relief scheme. That consultation was completed, and in the Autumn Budget, some proposed changes to were teased, including;
- the inclusion of data and cloud costs to qualifying expenditure
- updates to refocus support towards UK-based innovation
- changes to tackle abuse and improve compliance
Draft legislation on these areas is expected to be published in Summer 2022, to be included in the Finance Bill 2022-23 and to take effect from April 2023.
We’ve since been waiting to hear more about what these changes will entail and what they’ll mean for the scheme, and in December the R&D Tax Reliefs Report detailing the next steps was published by HMRC.
Here’s what it said.
Data and cloud costs
Responses from the consultation made it clear that datasets are a vital part of the R&D process, so from April 2023 they’re to be included in the scope of what costs can be claimed relief on.
That being said, there is also a recognition that datasets have a value beyond that associated with R&D, and so if the datasets can be sold, published to a third party, or have ongoing rights of use beyond the R&D project, relief may not be claimed against them.
Where access agreements cover multiple datasets but not all will be used in qualifying R&D, costs must be apportioned.
Staffing costs associated with data collection are already claimable, as long as the data is being collected for R&D and not for sale or other commercial purposes as well.
While this is to come into play in April 2023, the government will collect further views on implementing the changes from stakeholders after draft legislation is published next summer.
Focusing on innovation in the UK
Under the current rules for both schemes, companies are able to claim relief on R&D activity that is conducted overseas. In order to ensure the UK economy is benefiting from the tax relief as intended, some changes here have been announced.
- Where companies subcontract R&D activity to a third party, they will only be able to claim relief for that expenditure where that third party performs the work within the UK
- Where companies incur expenditure on payments for externally provided workers, they will only be able to claim relief on such expenditure where those workers are paid through a UK payroll
- If a company subcontracts work for performance overseas, it would not be able to claim R&D tax reliefs on that expenditure – but it would still be able to deduct those costs from taxable profits in the normal way
Companies will still be able to claim R&D tax reliefs on the costs of software and consumables sourced overseas, as well as payments for clinical trial volunteers overseas and payments for data and cloud-sourced overseas, as these are considered inputs to activity in the UK.
Again, draft legislation will be published next summer and stakeholders will be invited to comment on the implementation of these measures from April 2023.
Abuse and compliance
With concerns over abuse and boundary-pushing of the scheme growing in recent years, several steps to improve compliance will be made from April 2023, including:
- Requiring all claims to be made digitally (except those companies exempt from the requirement to deliver a Company Tax Return online)
- Asking for more detail within the claims, in particular on what expenditure the claim covers, the nature of the advance sought, the field of science or technology and the uncertainties overcome
- Claims will need to be endorsed by a named senior officer of the company, and companies will need to inform HMRC in advance that they plan to make a claim
- If through an advisor, claims will need to include details of the agent
The MPA view
Back in July, we published our thoughts on the consultation and what we’d like to see come out of it.
Our two key concerns – modernisation of the scheme in response to changing technology, and more steps to curb fraud and misuse – have been somewhat covered in this latest reform.
In the future, we expect even further expansion of what digital costs can be claimed for, especially in the green technology space, so are keeping an eye on the draft legislation that will cover this.
Furthermore, we are passionate about the reputation of the scheme, and believe the increase of unqualified advisors is no doubt affecting the perception and use of the incentive so would like to see fraud and misuse policed even more stringently, perhaps through regulation of R&D tax claim advice and administration.
If you’d like to know any more about today’s announcements or what great R&D tax relief advice looks like, get in touch with our qualified, accredited team or experts who can help.