Yesterday the Government released further details on the proposed changes to the R&D regimes. This follows the recent consultation on how to improve the R&D regimes to ensure the UK’s R&D incentives are globally competitive.
Whilst the Autumn Budget provided some headlines on the potential changes, yesterday’s report provides further clarity on what these will look like (as set out below). We welcome many of the changes, and were pleased to see some of our recommendations on tackling abuse included within yesterday’s report. Whilst the extension of the eligible costs to include datasets and cloud computing is positive, as anticipated, there will be restrictions on overseas costs from April 2023.
It is therefore fundamental that all claimants understand how these changes will impact their claims going forward, particularly given the proposal for advance notification of R&D claims and other requirements to help tackle abuse, including the need to disclose the details of the R&D agent who has advised on the R&D claim.
Proposed changes to R&D regimes from April 2023:
Inclusion of costs relating to licence payments for datasets and cloud computing costs
The R&D relief report sets out the eligibility criteria for the inclusion of datasets and cloud computing costs, with clear focus on ensuring that these costs will be limited to those that are core to the R&D activity. In particular, licence payments for datasets will only be eligible if the datasets cannot be resold or have ‘lasting benefit’ to the business. Similarly, for cloud computing costs, these will be limited to those costs directly used in R&D for the purposes of computational, data processing, analytics or software use. Any general overhead payments relating to virtual servers or data storage will be ineligible.
This clearly poses the question of how companies will be able to differentiate between eligible and ineligible datasets and cloud computing costs. HMRC have requested views on how this could practically be achieved and we will be looking to share examples with HMRC in due course - please do let us know if you’d be interested in contributing to this.
Limiting costs of overseas R&D
We now have clarity on what was meant by the Budget announcement of ‘refocusing reliefs towards innovation in the UK’. In summary, there are two significant changes:
- Where companies subcontract R&D activity to a third party (mainly relevant for SME claims but also applicable to RDEC claims in certain circumstances), a claim will only be possible if the third party performs the work within the UK.
- Where companies incur expenditure on payments for externally provided workers (EPWs), a claim will only be possible where the workers are paid through a UK payroll.
Whilst companies will still be able to claim for the costs of inputs such as clinical trial volunteers, consumables, software licences, data and cloud computing costs sourced overseas, the restrictions to exclude resource costs associated with subcontractors and EPWs will impact a number of companies. There may also be practical challenges for businesses to identify what work is undertaken in the UK, particularly for work performed by third parties. It is important that those impacted share their views as the Government is keen to understand if there should be any narrow exceptions to these rules.
The R&D report sets out the Government's concerns over abuse and ‘pushing of boundaries’, particularly by R&D advisors with limited tax experience encouraging companies to submit dubious claims. To tackle this abuse of the R&D regime, a new ‘cross-cutting’ team focused on abuse will be set up and the Government intends that all claims from April 2023 will be subject to the following rules:
- advance notification to HMRC of the intention to submit claims;
- digital submissions;
- require documentation which provides a breakdown of expenditure and key details on the R&D activities undertaken, including the scientific / technological advances and uncertainties;
- claims to be endorsed by a named senior officer of the company; and
- details of the R&D agent who has advised the company on the claim.
There will be changes to the rules to address some perceived unfairness and anomalies, for example in preventing going concern restrictions in cash credits where solvent businesses have carried out trade transfers. These changes are broadly positive and cover many points we have previously discussed with HMRC.
HMRC are welcoming responses to the R&D report published with the deadline set for 8 February 2022. We would be delighted to discuss the potential changes with you and support you with shaping your response to the report if you wish to respond.