Tax update: R&D tax regime – where are we now?

As reported in our last issue of Talking Tax, a number of changes to R&D tax incentives were on the horizon. We recap on the key changes now that the rules have started to bed in, as well as look ahead to an even bigger overhaul from April 2024.

Additional information requirements 

All R&D tax relief claims filed since 8 August 2023 now require an online Additional Information Form to be submitted with details of projects undertaken, a breakdown of the qualifying costs, the workers involved in R&D activities, as well as details of the agent who has helped to prepare the claim. This form needs to be filed online prior to the submission of the company’s corporation tax return including the R&D figures, otherwise HMRC will remove the R&D tax relief claim from the company’s self-assessment tax return.

Advance notification

Another key change to be aware of is that new claimants, as well as companies that have not claimed R&D tax relief in the last three calendar years, will need to notify HMRC within six months of the end of the accounting period in which R&D took place that they intend to make a claim.

This requirement is effective for any accounting periods beginning on or after 1 April 2023, so a company with a March year end, for example, would need to notify HMRC by 30 September 2024 of its intention to make an R&D claim for its year ending 31 March 2024 i.e. the advance R&D notification must be made at least six months before the statutory deadline for filing the corporation tax self-assessment return.

Businesses that have not made R&D claims previously or in recent years, will therefore need to review expenditure and R&D activities much earlier and take action, where appropriate, by completing a standardised claim notification form. If advance notification is not given, the company will be precluded from filing an R&D claim for that period; therefore ‘protective’ advance notifications should also be considered if there is even a possibility of making a claim.

A ‘simplified single scheme’

A consultation was released in January 2023 with proposals to move towards a single scheme of R&D tax incentives for both large companies and SMEs, similar to that of the current R&D Expenditure Credit (RDEC) scheme. Following responses to the consultation, draft legislation was published in July 2023 along the same lines as previous proposals. Some changes to the existing RDEC scheme will be made, in particular to allow companies to claim payments made to subcontractors as part of an R&D project, as currently possible with the SME scheme.

Despite calls by professional accountancy and tax bodies and other stakeholders for a delay in introducing the new R&D scheme from the proposed date of 1 April 2024, the Chancellor only announced a very small concession on this in his 2023 Autumn Statement: rather than introducing the new scheme for R&D expenditure incurred on or after 1 April 2024, it will now instead apply for company accounting periods beginning on or after 1 April 2024. This will lead to the unusual position where R&D expenditure incurred after 1 April 2024 will attract different R&D tax incentives depending on the claimant company’s year end.

The 2023 Autumn Statement announced that there will be some changes to the draft legislation previously published in July 2023, in order to address some points raised during the consultation process. In particular, changes will be made to determine the appropriate claimant when activities are subcontracted; it will be necessary to consider whether it is R&D activities that have been subcontracted or other services.

Given the radical nature of the overhaul of the R&D tax incentives, and the fact that some companies will start to be affected from April 2024, it is to be hoped that the new legislation will be finalised and made available as soon as possible, to allow time for companies and their advisers to assimilate the new rules.

Relief focused on UK activites

One change which had originally been due to come into effect from April 2023 related to an exclusion of certain overseas expenditure from eligibility for R&D tax credits. At the 2023 Spring Budget, however, a 12-month delay was announced to allow the government to consider the impact of the new rules with a single R&D regime.

From April 2024 most costs incurred in the use of third-party overseas subcontractors and externally provided workers (EPWs) will no longer be qualifying unless it is necessary to undertake the R&D overseas and it would be unreasonable for the claimant company to replicate the required conditions in the UK.

HMRC enquiries

HMRC is continuing to place scrutiny on R&D tax relief claims in an attempt to capture any irregular and potentially fraudulent claims. The introduction of new filing requirements such as the Additional Information Form should help to flush these out further and so we do not expect HMRC enquiries into R&D tax relief claims to ease up in the short term; documents released alongside the Chancellor’s Autumn Statement make it clear that this remains an area of particular focus for the government and HMRC.

If you are looking to make an R&D claim you should carefully consider whether you believe the company has genuinely undertaken projects aimed at achieving an advance in science or technology. We can help to guide you through this process and assist with making a claim, where appropriate.

For further advice, please contact David Clift or Jemma Vaughan on 01242 680000.

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