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Following recent consultations and at Rishi Sunak’s latest budget, it was proposed that the R&D relief regime would be modernised to allow certain IT related costs. In addition, it was announced that relief for overseas R&D would be restricted.
Reference has also been made to potential abuse of the scheme through the increasing presence of unscrupulous claimants.
Details of the new measures to both amend the costs that may be included in the scheme and curb potential abuse were released by HM Treasury this week.
Modernising of scheme to allow Data and Cloud Computing costs
This is a welcome addition to the scheme reflecting the need to allow modern costs that are integral in developing cutting edge developments in the IT sector. The costs that will be allowed from April 2023 are:
- License payments for datasets
- These may be included where they are used directly for R&D
- Restrictions will relevant where the datasets can be resold or will have a lasting value to the business (beyond the duration of the R&D)
- This means that the terms of end user access agreements will need to be considered.
- Cloud computing costs – attributed to computation, data processing, analytics and software
- These must be directly incurred on R&D
- General overheads in cloud computing packages will be excluded (such as rental costs)
Restrictions on contributions towards overseas R&D
During the recent budget, Rishi referred to the fact that expenditure included in R&D claims was higher than R&D actually taking place in the UK. Part of this ‘gap’ was attributed to R&D relief funding overseas R&D, rather than UK based activities (as intended). As such, reforms to restrict relief for overseas activities were announced. Further detail of how this these restrictions will be implemented are as follows:
- Subcontractor costs
- Where companies subcontract R&D activity to a third party, they will only be able to claim R&D relief for these costs where the performance of the work takes place in the UK. Costs for overseas performance will be excluded.
- There are some exemptions for payments for clinical trials or software and consumables sourced overseas.
These changes will affect SMEs in the main (large companies are already very restricted in the subcontractor costs that may be claimed).
- External workers
- Companies may only include third party workers (such as agency staff) in their R&D claim, where the workers are paid through a UK payroll. This will prevent the inclusion of workers paid by an overseas company.
These proposals to amend cloud and data costs and restrict overseas costs will be included in the 2022-23 finance bill to be legislated with effect from 1 April 2023. The government are still requesting input into whether these rules need to be finetuned so that they are fair and pragmatic to operate. If you would like to contribute towards this, we would welcome your thoughts.
Targeting potential abuse
The government has raised concern that the R&D regime is open to abuse which could be exacerbated by the growing number of R&D advisers that are not members of professional bodies. As such, HMRC have pledged to provide additional resource through the introduction of a new team focussed on reducing abuse. In addition, there will be a tightening of compliance around the scheme as set out below:
- All future claims will need to be made digitally with more detail provided within the application such as:
- Details of the expenditure
- The nature of the technological or scientific advance sought
- The field of science or technology
- The uncertainties overcome
- Each claim will need to be endorsed by a named senior officer within the claimant company
- Companies will need to provide HMRC with advanced notice of their intention to claim.
Whilst the new compliance requirements may seem a little more onerous, existing claimants that work with their advisers to prepare R&D reports will already be meeting many of the above conditions. The new rules are therefore intended to prevent the inclusion of spurious claims in as company’s corporation tax return and place more onus on the company to take responsibility for their claim (rather than leaving this to an unqualified adviser who may not fully understand the extent of the business’s activities).
These new measures are expected to take effect from 1 April 2023.
If you would like to discuss any of the proposed changes, please do not hesitate to get in touch.