R&D tax relief 2022 – Key industry changes

As part of the government’s tax administration and maintenance review, HMRC have released further information on key changes to the R&D tax relief 2022 regime.

The overall policy objectives remain the same, being to ensure that:

• The UK remains a competitive location for cutting edge research
• R&D tax reliefs remain fit for purpose
• Taxpayer money is effectively targeted

Data and cloud computing costs 

Since the inception of the R&D Tax Credits Scheme in 2001, the world has become a very different place, with technology having a huge part to play. In recognition of this, costs such as data purchases and cloud hosting will become qualifying expenditure.

So, the following new categories of qualifying R&D expenditure will be eligible for relief from 1 April 2023:

• licence payments for purchasing datasets which are used directly for R&D
• cloud computing costs that can be attributed to computation, data processing and software

Refocusing the relief towards innovation here in the UK  

The autumn budget included a commitment for greater emphasis on R&D performed in the UK. There was a view however that restricting tax relief to UK activities only could weaken the incentives for companies to base the leadership of their global R&D efforts in the UK.

So, the government intends that from 1 April 2023:

• where companies subcontract R&D to a third party, they will in future only be able to claim relief for expenditure where the third party performs the work in the UK
• under both R&D schemes, where expenditure is incurred on externally provided workers (aka EPWs), they will only be able to claim relief where those workers are paid through a UK payroll.

This could significantly reduce the R&D tax credit claims for some businesses where, for example, they have overseas subsidiaries in key locations for specific labour markets.

Simplification

HMRC is also considering whether it continues to maintain two separate relief systems – The Research & Development Expenditure Credits (RDEC) and the Small or Medium sized Enterprise (SME) scheme or consolidate them into one.

Abuse and compliance 

Concern over abuse involving the R&D tax reliefs has caused the National Audit Office to extend the qualification of HMRC’s 2019-20 accounts.

The lucrative nature of the scheme has led to some significant cases of abuse and ‘boundary-pushing’ which has led to unfairly rewarding companies who should not have qualified.

The government intend to set out how they will tackle abuse of the scheme and improve compliance.

HMRC’s next steps to improve compliance announced in the report include:

• Further increase in resource for R&D tax credit compliance from HMRC, with the creation of a new team focused on abuse
• All claims of R&D tax relief will in future have to be made digitally, unless exempt
• The digital claims will require more detail on qualifying R&D expenditure, the nature of the advance in science or technology and the technological 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 the agent who has advised the company on compiling the claim.

It is not yet clear from the HMRC report when all of these new compliance requirements are going to come into effect, but digital claim submissions will be put in place from April 2023.

For more information about the impact of the reforms on your own business, or to discuss your potential for an R&D tax claim get in touch.