Changes to UK R&D Tax Relief Regime in 2023

From 1 April 2023 the landscape of UK R&D tax relief is changing. The changes from the Autumn budget in 2021 are expected to be implemented and further changes could be on the way with some affecting businesses positively, whilst for others, it could mean a significant reduction in tax credit which a company receives.

What are the most significant changes?

The most significant changes are:

• Restrictions for businesses conducting R&D activities overseas
• The new inclusion of cloud computing and data costs in qualifying R&D expenditure
• HMRC to focus more on compliance and tackling abuse

Changes to R&D tax credits for overseas activities 

Currently, overseas R&D costs recharged to a UK claimant company qualify for R&D tax incentives in the UK.

However, from 1 April 2023, R&D tax relief will be further restricted to activities undertaken in the UK.

So, from the 2023/24 tax year, R&D activity will have to be physically located in the UK in order for the costs to be included. UK companies who currently claim R&D costs paid to, for example, overseas group companies or overseas third parties may no longer be able to include these costs in their claims.

The impact of this change will largely depend on the size of the business and the amount of R&D taking place outside the UK.

Some significant impacts of the proposed changes are:

• Subcontracted out R&D will only qualify for R&D incentives where the third party undertakes the R&D in the UK
• Under the research and development expenditure credit (RDEC) regime, payments to Qualifying Bodies (e.g. universities or health bodies) to undertake independent research will only qualify if the activities are undertaken in the UK
• Payment to Externally Provided Workers (workers provided by third party staff providers) will only qualify where the workers’ salaries are paid through a UK payroll

What steps can businesses take to help maintain their UK R&D tax relief benefits?

Businesses that maintain all or part of their R&D activities overseas will need to re-evaluate their potential R&D claims. They may need to consider the practical, commercial and cost implications of maintaining their current structure compared with moving activities to the UK.

Claims for cloud and data expenditure 

At present, costs related to cloud computing and data cannot be included in claims for R&D tax relief. However, from 1st April 2023 these costs will qualify.

This new addition will mean businesses that, for example, pay licence fees to rent cloud computer storage space, or pay for data costs in the context of R&D will now be able to incorporate these costs into their claims.

Many businesses will benefit from this change, particularly in tech & media, and could mitigate losses from the restrictions to overseas R&D costs.

Tackling abuse and compliance – the HMRC crack-down

The government have concerns over the validity of certain R&D claims that are being submitted and HMRC have recently hired an additional 100 inspectors in order to deliver more robust and consistent reviews of R&D submitted claims.

The government wish to introduce new measures to combat abuse and improve compliance from April 2023, including:

• all claims to the R&D reliefs – either for a deduction or a tax credit – will in future have to be made digitally (except from those companies exempt from the requirement to deliver a Company Tax Return online);
• these digital claims will in future require more detail – for example, on what expenditure the claim covers, the nature of the advance sought, the field of science or technology, the uncertainties overcome;
• each claim will need to be endorsed by a named senior officer of the company;
• companies will need to inform HMRC, in advance, that they plan to make a claim;
• claims will need to include details of any agent who has advised the company on compiling the claim.

HMRC are also looking closely at claims of portfolio companies backed by private equity investment and so businesses should be ensuring, as always, that their claims are accurate, robust and have sufficient supporting documentation to stand up to HMRC scrutiny.

Need help calculating your tax credits? 

The new restrictions to overseas costs and the inclusion of cloud computing and data costs will affect businesses in different ways and it is important understand how the changes will affect your business.

We encourage you go get in touch with our expert team to assess the potential implications of these changes and how they might impact your ability to claim R&D tax credits in the future and also to ensure you remain compliant under the new rules.

Get in touch

Cowgills are experts in R&D tax claims, with over 15 years’ experience in reviewing, managing and submitting successful claims. Get in touch if you need our help.