April 2023 will bring several significant changes to research and development (R&D) tax reliefs. Some businesses will find these changes positive. Whilst other changes can affect what income qualifies for R&D tax relief. Organisations need to ensure they remain compliant with new rules.
Although Parliament is still considering these new measures, details of upcoming amendments are now published.
R&D activities overseas
From April 2023, the costs of overseas workers will not qualify for UK R&D relief. With these new rules, R&D activity must be located in the UK for the costs to be included.
The Government indicated that it does not want to discriminate against organisations that cannot practically conduct R&D in the UK.
Expenditure on overseas R&D activities can still qualify where:
- Material factors (such as environment, geography, population) are not present in the UK and are necessary for the research
- Regulatory or legal requirements that must take place outside of the UK, such as clinical trials
Considerations must be in place for international structures and connections of businesses carrying out R&D activities. Organisations need to re-evaluate their potential R&D claims if they maintain all or part of their research overseas. An imposed blanket ban may stop UK groups with overseas subsidiaries working on a UK project from making a claim, even if the innovation benefits the UK parent company.
Claims for cloud computing and data expenditure
Currently, organisations cannot include any costs relating to cloud computing and data in their R&D tax claims. Many of the UK’s most innovative tech and media companies do not get the tax benefits of the R&D tax credit scheme.
From 1 April 2023, the costs of purchasing data for R&D activities or using cloud computing services will qualify.
Many businesses use the same cloud services throughout their operations, so apportioning specific R&D costs may be a challenge.
HM Revenue & Customs (HMRC) are likely to provide clarity in upcoming guidance.
Anti-abuse action
The new measures will include compliance procedures to deter speculative or fraudulent claims amidst growing concern that the R&D tax relief system is open to abuse.
These measures include:
- a digital claims system
- additional details are required with all claims
- a named senior officer of the company must endorse each claim
- notifying HMRC, in advance, of a company’s intentions to submit a claim
- the details of any agent advising on the claim
HMRC has new powers and enforcement action to tackle R&D tax advisors and invest further resources for additional risk profiling and scrutiny of R&D tax relief claims.
Further reforms?
We expect to gather more details for future reforms to the R&D tax credit system in this year’s Autumn Budget.
In the Spring Statement, the Chancellor of the Exchequer alluded to further changes to the R&D tax relief system. The Treasury hopes to give an additional £5 billion for R&D funding by 2024.
With these new restrictions, we understand the implications for our clients. For advice on how these changes might impact your R&D projects, speak with our R&D tax relief experts today.
