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Draft legislation published in July 2022 will bring about some important changes for companies making claims under both the R&D Tax Relief regime for SME’s and the Large Company R&D Expenditure Credit rules.
08 September 2022
Draft legislation published in July 2022 will bring about some important changes for companies making claims under both the R&D Tax Relief regime for SME’s and the Large Company R&D Expenditure Credit (RDEC) rules.
Whilst applicable to companies with accounting periods starting on or after 1 April 2023, early awareness of some of these changes could be key and require claimants to take action soon before they apply in practice.
R&D tax relief for qualifying subcontracted activity will only be available where that subcontractor performs the work in the UK, and/or for Externally Provided Workers (EPWs) the relief will only be available where these individuals are paid through a UK payroll.
The key point of the change is to encourage innovation to take place within the UK and incentivise the up-skilling of domestic workers. The adverse effect of this is that R&D Tax relief claims will be reduced for those businesses using overseas resource for part of their R&D activities.
There might be number of factors why there is currently a lack of UK based expertise, particularly in R&D intensive sectors such as software and manufacturing. Many companies therefore access overseas resource due to commercial need, and indeed there are a great many skilled software developers currently being accessed by UK R&D Tax relief claimants who are based or choose to base themselves in any number of worldwide locations where their only necessity to be able to work is a good internet connection.
The UK is part of a global economy and use of overseas resource is commonplace. The current proposal to deny R&D relief for most overseas workers involved in R&D appears to be a blunt tool to achieve the government’s intention.
Exemptions
There will be some narrow exemptions where factors such as geography, environment, population, regulatory or other social conditions that are not present in the UK are required for the R&D activity, but we anticipate that this might have only limited application.
Impact of the proposed changes
There is a risk that the proposed changes may achieve the opposite of the intended effect – companies may in fact reduce their spend on innovative activities, lose some valuable subsidy under the R&D Tax relief regime, or worse yet, relocate overseas and fall out of the UK economy altogether in pursuit of more favourable regimes in other jurisdictions.
This is an important change, where there is a clear call to action for any claimants making use of overseas resource.
Now is the time to consider the potential impact of this change and assess whether arrangements with contractors or externally provided workers, or where they are based, might be revised.
The new legislation is set to introduce a requirement to notify HMRC of the intention to make an R&D Tax Relief claim in advance of filing.
The measure requires the claimant to notify HMRC within 6 months after the end of the accounting period to which the claim relates, via an electronic form. This applies to claimants under both the SME and Large Company (RDEC) regimes.
If this 6 month window is missed, then the opportunity to file a claim for the accounting period will be lost.
The effect of this measure is to reduce the horizon to make a claim, where currently companies can look back 2 years, to just 6 months.
For example, a potential claimant with qualifying R&D activity carried out during the year ending 31 March 2024 will only have until 30 September 2024 to notify HMRC that they intend to make an R&D claim. Previously, that company would have been able to make a claim at any time up to 31 March 2026.
When will this apply?
This requirement applies to first time claimants or those who have not submitted a claim in the previous 3 accounting periods only.
This does not apply to companies who that regularly make R&D claims, and have made a submission in the last 3 years.
Action point
The key action here is that if as a business you are involved in R&D and have not previously (or recently) claimed R&D Tax Relief, you are alive to this upcoming measure and ensure you notify the claim within the new 6 month time limit.
Additional information requirement
R&D Tax Relief claims, and the notification requirement, will need to be made via a HMRC portal. To be a valid claim additional information will also need to be provided to support the claim.
Precise details related to the portal and the additional information required are not yet known (secondary legislation is to follow), but it is known that the submission will need to include details of any agent who has advised the company on compiling the claim.
It will therefore be important to partner with a reputable accountant or adviser, ideally one which is a member of a professional body (such as the ICAEW or CIOT) and thus subject to the Professional conduct in relation to taxation (PCRT).
In a really positive development for R&D Tax Relief, HMRC has widened the scope of development activities which can be included in a claim to include both cloud computing costs and advances in the field of pure mathematics.
These will have real benefits to company’s in the Technology, Innovation and Growth (TIG)
The inclusion of cloud computing will mean that companies making use of hosted environments can include these costs in their claim, and that cloud computing can be increasing used as part of the R&D process.
It has often been a point of ambiguity in assessing a claim whether development of a complex algorithm is a necessary aspect of programming, or resolves a complex mathematical problem. The inclusion of advances in pure maths as a qualifying activity should very much help bring some important clarity to such claims.
Costs incurred by claimant companies to meet the Health and Social Care Levy are qualifying staff costs for the purpose of R&D Tax Relief.
If you want to find out more about R&D Tax Relief and how this can benefit your business, head to our R&D KnowledgeHub or contact a member of our R&D team.
