In this edition Corporate Tax Partner Neil Insull looks at the upcoming changes to Research & Development (R&D) tax relief and what you need to know before the changes come into effect from April 2023.
Why is it relevant?
The UK has a generous R&D tax credit system for companies undertaking qualifying R&D. The R&D relief regime has been designed to encourage investment in R&D and to make the UK an attractive location for innovation businesses.
Recently, the UK Government has expressed concern that the R&D tax relief system does not do enough to promote innovative activity and job creation in the UK.
The Government is also concerned about the prevalence of “dubious” claims prepared based on advice from R&D advisers that are not members of professional bodies and have no background in tax, and who often charge on a commission basis.
In light of these concerns, the Government has drafted legislation to make certain important changes to the R&D tax relief system. These changes will take effect from April 2023.
Who is it relevant to?
Companies of any size that make R&D tax relief claims in the UK.
What do you need to know?
With effect from April 2023, companies will only be able to claim relief for subcontracted expenditure where the third party performs the work in the UK, or where it is necessary to undertake the work overseas due to ‘geographical, environmental or social conditions not present or replicable in the UK’. Using workers overseas because of cost or availability would not be valid reasons. Similarly, relief will only be available for payments for externally provided workers (EPWs) where the workers are taxed through PAYE or work overseas for the reasons set out above.
Changes will also be made to the process for making claims for R&D relief. Companies will need to inform HM Revenue & Customs (HMRC) in advance that they plan to make a claim.
All claims will have to be made digitally through HMRC’s tax return portal, and those claims will have to be supported by more information including a description of the R&D undertaken, breakdown of qualifying costs, detail of any agent who has advised on the R&D claim, and space for sign off from a senior officer of the company.
In addition, companies that are making their first R&D claim will have to notify HMRC within six months of the end of the relevant accounting period, so six months before the filing deadline for the tax return itself. How the notification will be made is still to be confirmed by the Government.
The good news is that there will be an extension of the scope of qualifying expenditures to include the costs of datasets and of cloud computing. Certain other amendments will also be made largely to clarify the operation of the relief and to eliminate anomalies and inefficiencies in the current rules.
What should you do next?
If you would like to know more about R&D tax relief, or how these changes will impact on your business, please get in touch with your usual Blick Rothenberg contact or Neil Insull, using the details on this page.