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Draft guidance on R&D changes from 1 April ’23

New guidance was released on 20 December 2022 which sets out further detail on how the imminent R&D changes will impact companies claiming R&D relief. Here we take a look at what this means for you and give our thoughts.

The guidance is still in draft, and queries are welcomed by HMRC.  As such, at the time of writing we are contributing our comments and are expecting minor changes and clarifications before finalisation.

If you would like to read the full guidance, please click here

Additional information required to support claims

For accounting periods commencing after 1 April 2023 (generally periods ending on 31 March 2024 onwards), claimants will be required to submit a R&D form with prescribed information about their R&D claim.  The form must include detail of the main R&D projects (minimum of three where applicable), covering at least 50% of the R&D claim expenditure and describing the activities under five key headings.

To satisfy these headings, the company will need to explain where the baseline in science and technology is drawn in their relevant field and how their project is creating an advance for the industry over and above this line (or at least above what is publicly known or made available).  They will also need to clearly set out the challenges faced during the project’s lifespan and how they were overcome.

These requirements are a formalisation of areas that should be covered by R&D advisers already.  However, the use of these set headings and format prescribed by the form will provide uniformity between claims, presumably to make HMRC’s job of reviewing the claims easier and more effective.

Whilst standardising the information makes sense for HMRC.  For businesses without time recording systems, we can envisage some companies incurring challenges quantifying costs between projects to cover at least 50% of all R&D expenditure.  We would envisage that HMRC will need to allow companies to take a pragmatic approach in making such estimates.

The additional requirement also stipulates that an individual within the business needs to take responsibility for the claim (to encourage businesses to take more accountability for claims).  This should be a senior individual within the business and presumably someone who is also cognisant of the company’s tax affairs (typically an FD).  We believe clarity should be provided by HMRC as to whether the responsible person should be a technical individual with oversight of the technological advances sought within the R&D project, or someone with a financial overview.

Advance Claim Notification

The advance claim notification will help HMRC identify perceived higher risk claimants who do not have a history of claiming R&D and may therefore be more prone to misjudging the suitability of the scheme, or simply making mistakes. Advanced claim notification is required to be made within six months of the end of the period of account to which the claim relates.  Not only do brand new claimants need to make the advance notification, but those who have not claimed within the prior three years.

In terms of the prior three-year rule, there currently seems to be a disconnect between the way the draft legislation is written and the guidance. The guidance indicates that the three-year rule will be satisfied if a claim has been submitted in one of the earlier three years (which given the two-year submission deadline can relate to period ending prior to three years before the current claim period.)  Whereas the legislation suggests that advance notification is required if a company has not made a claim in any of the three accounting periods immediately preceding the claim period.  Clarity is therefore needed to understand whether companies need to track historical submission dates (which can be extended where returns are amended) rather than simply identifying whether a prior period return includes an R&D claim.

Overseas Expenditure

For accounting periods commencing after 1 April 2023, third party R&D costs for subcontractors or external workers may only be included where their activities take place in the UK, subject to some exceptions (set out below).

The guidance provides an example stating that employees of the subcontractor must be carrying out their duties in the UK (to allow the costs to qualify for relief). The scenario could therefore arise, where a company engages a UK subcontractor who uses overseas resource to deliver the services. In this scenario the subcontractor costs will not be allowable.

If a company engages external workers through a third-party agency, then PAYE details will also be required (confirming their employment in the UK).

This additional compliance burden will add further complexities and administration for the claimant company, particularly where they work with multiple third parties.  We question whether it is reasonable to impose this extra responsibility on the R&D company, or whether it will discourage a claim for third party costs altogether?

The guidance also provides further detail and examples on the exceptions that allow overseas R&D to be included in a claim.  All three of the following factors must apply:

  • The necessary conditions are not present in the UK
  • The conditions are present in the location where the R&D is undertaken
  • It would be wholly unreasonable to replicate the conditions in the UK

The example provided to illustrate when all of the above might apply is when testing is carried out using sensors on an active volcano.  Given the absence of an active volcano in the UK, it would seem logical that payments for work carried out in the volcano’s geographical location should be allowed.  The ‘wholly unreasonable’ factor is explained further in the guidance suggesting that where a test facility is only available overseas and it would be wholly unreasonable to replicate this in the UK, or time pressure is a factor, then the use of the overseas facility may be acceptable.

Legal or regulatory requirements could also justify the inclusion of qualifying overseas expenditure, such as regulatory body deciding that drug testing must take place in a certain country outside the UK.  In all cases HMRC will expect to see clear evidence justifying the inclusion.

Consistent with prior publications and the draft legislation, HMRC are continuing to be very explicit that overseas expenditure will not be accepted if cost or the availability of workers are the main factors for the company deciding to carry out work overseas.  Unfortunately, for many businesses, the decision to use overseas resource is often driven by cost for commercial reasons. The loss in the R&D incentive is therefore unlikely to be enough to change this behaviour, and hence the intention to focus more R&D activities in the UK because of this rule change may be unlikely to crystallise.

Data and Cloud Costs

As expected, Data and Cloud costs may be included for accounting periods commencing after 1 April 2023, where their use contributes to the R&D.  HMRC also explain that where these services are used for multiple purposes, then an apportionment between R&D and non-R&D activities will be accepted. A practical methodology for applying a qualifying ratio may be based on a record of staff hours, number of licenses used on R&D or a ratio of R&D: non-R&D storage in the case of data costs.  HMRC have stipulated it will be important for companies to keep evidence of the basis behind any apportionment.   This is the approach we have typically seen for the inclusion of other consumable costs such as utilities and other software costs, and so should not create too much additional burden in our view.

The guidance also provides further details of when data and cloud costs may not be included.  These exclusions broadly apply where the company has an onward contract or agreement to sell the data onwards, and they are therefore being partially or wholly funded by a third party customer.  This will not be the case where the data in question has been transformed as a result of the R&D into an unrecognisable form.

Again, this rule is not dissimilar to the rule applied for more tangible consumables such as prototypes or samples which are sold onwards (the value received is also discounted from the claim).


Advances in mathematics were previously disqualified from the R&D incentive tax relief schemes.  However, it has been acknowledged that mathematics supports the development of underlying technologies such as in IT and robotics.  As such, the definition of R&D given by the BEIS guidelines will be updated to include mathematics as a qualifying activity.

What next?

Finalised guidance should be issued in Spring following receipt of comments from advisers and taxpayers at the end of February.  If you would like to discuss how these changes impact your claim, please contact your CP Innovation adviser.




DONNA CHALLINOR, CP Innovation Director

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