The Research and Development world has moved on a lot since the government’s R&D tax relief system was first set up. The 2018 Budget already acknowledged that, making changes to the SME Tax Credit Cap and introducing the new CT600L form.
In the Spring Budget of 2021, a review was launched of both the RDEC and SME schemes to make sure they were keeping pace with changes in technology and business practices. That review ran from the 3rd of March to the 2nd of June 2021, with the Autumn Budget of 2021 announcing the following proposed changes:
- Acknowledge the importance of data and cloud costs in UK R&D work.
- Refocus the incentive and reward schemes toward work conducted within the UK.
- Crack down more effectively on invalid claims and abuse of the systems.
A further consultation was introduced to gather feedback and responses at every level from individuals and businesses to agents and professional bodies and this ran until the 8th February. Should these amendments and additions go ahead in their current form they will be coming into force in April 2023.
Here’s what they mean in real terms for innovative UK businesses:
Data and cloud computing costs
Bringing the costs associated with cloud and data services into the scope of R&D tax relief claims is likely to be a significant boost for companies working in technology and software. The specific costs to be brought under the schemes include licence payments for datasets and cloud computing expenditure associated with “computation, data processing and software”. As always, there will be some exceptions to keep in mind. Datasets that can be resold or that have value outside of the R&D project in question won’t count toward a claim, for instance. The point is to keep the tax relief targeted on costs that are strictly necessary for the R&D, and which can’t easily be reimbursed elsewhere.
Refocusing on UK R&D work
The proposals coming into force in April 2023 also include measures designed to limit R&D tax relief claims for subcontractor payments to cases where the actual work is done within the UK. So, for both the RDEC and SME schemes, if the third party being subcontracted is doing the actual work abroad, the associated costs won’t fall within the scope of a tax relief claim. Obviously, those costs can still be counted against taxable profits in the normal way. The same principle applies to externally provided workers (EPWs), whose costs will only count for R&D tax relief if they’re paid through a UK payroll.
These changes are specifically for subcontractor and EPW costs. So, for instance, software and consumable costs can still be claimed for, even if they’re sourced abroad.
Compliance and abuse
With HMRC estimates placing claim errors and deliberate fraud at £311 million (3.6% of the total cost of tax relief) for 2019-20, the following rule changes have been announced:
- All claims will now need to be made digitally, except for businesses that are exempt from filing online Company Tax Returns.
- Claims made digitally will need to be more detailed, both in terms of what they cover and the specifics of objective and approach.
- Claims will need to be endorsed by a specific senior company officer.
- Businesses will have to inform HMRC in advance of their plans to make a claim.
- Companies will have to provide details of any agent advising the company on putting their claim together.
The future of R&D Tax Credits
Broadly speaking, there’s a lot of good news in the revisions being made to the UK’s R&D tax relief schemes. Allowing tax relief on certain types of cloud costs and dataset licence payments is a positive and logical move, but we’d like to see more flexibility in some of the rules. Under the government’s proposals, for example, a dataset that’s critical for an R&D project wouldn’t be eligible for tax relief if it provided any value later on.
Another issue we’re looking closely at is the set of rules covering overseas subcontractors. Remote working has become increasingly common in recent years, and there are some real questions about “where” any given piece of work is being done. If a codebase, for example, were being hosted in the UK but worked on remotely from abroad, what would the status of its associated costs be for tax relief? In complex scenarios, such as UK nationals working from overseas for a UK company, would those costs be automatically excluded from R&D claims? Some extra clarity and flexibility will go a long way here.
As for the issues around fraud and compliance, while the proposals are generally good, they do raise a few technical questions. For instance, we’ll need more detail on how the “digital” submission of claims will operate in practice. We’d also like to ensure that the need to give HMRC advance warning of an upcoming claim doesn’t prevent, for instance, companies facing unexpected technical challenges within a claim period from accessing tax relief.
With all these changes coming into force, RIFT have made sure that all our teams are fully aware of the new guidelines well before they come into play. We’re also continuing to fight the corner of innovative UK businesses by pressing HMRC for greater clarity and flexibility.
If you have a query about your claim or how the scheme changes will impact your R&D submission, please contact the team on 01233 653002 or at email@example.com.