Spotlight on… How the reforms to R&D tax relief may affect you
The publication of the draft Finance Bill 2023 was a landmark day for the future of R&D tax relief
Why is it relevant?
The publication of the draft Finance Bill 2023 was a landmark day for the future of R&D tax relief and includes several proposed changes to both the R&D SME scheme and the R&D Expenditure Credit (RDEC) scheme.
Notwithstanding these changes, the UK’s R&D tax relief regime provides a generous incentive to undertake R&D work in the UK, with companies that are within the scope of UK Corporation Tax potentially eligible to claim a cash credit of up to £33.35 for every £100 spent on qualifying R&D work.
Who is it relevant to?
All companies undertaking R&D and claiming or thinking about claiming R&D tax relief, particularly those who are outsourcing R&D work outside the UK.
What do you need to know?
There are two measures specifically that are likely to have a significant impact on the number of companies eligible to claim relief:
Removing R&D tax relief for non-UK subcontracted work
Under the proposed changes companies outsourcing R&D work outside the UK, or using agency staff outside the UK, will no longer be able to include those costs in R&D claims for accounting periods beginning on or after 1 April 2023. By exception, if the work must be undertaken overseas for “geographical, environmental, or social” conditions not present or replicable in the UK, or if “legal or regulatory requirements” require the work to be undertaken abroad, those costs can still qualify. However, if the reason is cost, the level of expertise, or availability then then enhanced relief will no longer be available.
Six months to notify HMRC of the first R&D tax relief claim
For accounting periods beginning on or after 1 April 2023, companies making a claim for the first time must notify HM Revenue & Customs (HMRC) within six months of the end of the relevant accounting period.
The Government also announced the following changes for accounting periods beginning on or after 1 April 2023:
- The scope of qualifying expenditure will increase to include the costs of datasets and cloud computing
- Claims will be required to include a breakdown of costs across qualifying categories and provide a brief description of the R&D
- Each claim will need to be endorsed by a named senior officer of the company.
- Claims will need to include details of any agent who has advised the company on compiling the claim
What should you do next?
Companies with a year end of 31 March 2023 who contract R&D work outside the UK, will see these rules impact from 1 April 2023. Companies may consider shortening their period of account to a date earlier than 31 March 2023 to at least delay the impact of the new rules. The deadline is another reason to plan ahead of their year-end – ideally before any expenditure is incurred – to maximise the claim for R&D relief.
We have a wealth of experience of helping clients prepare and file R&D tax relief claims. If you would like to discuss the matters highlighted, or R&D tax relief more generally, please get in touch.