Since early 2021, the Government has been releasing their thoughts for reforming R&D tax reliefs. They set out plans in their R&D Tax Reliefs Report in November 2021 and further guidance was delivered by the Chancellor as part of his tax plan in his annual Spring Statement last month. It shows that from April 2023:
- data and cloud computing costs should be allowable for R&D tax relief, including acquisition of datasets, cloud computing costs and cloud storage to the extent it is attributable to qualifying R&D;
- 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, for example, for environmental testing or due to regulatory reasons;
- pure mathematics should be a qualifying R&D cost; and
- there will be a drive towards tackling abuse of R&D tax credits by making the process wholly digital, with increased detail and a proposal that advance notification of claims could be required.
The Chancellor also mentioned in the Spring Statement his intention to consider increasing the generosity of the R&D expenditure credit scheme.
At Hazlewoods, we welcome the broadening of qualifying R&D costs. However, we feel further consideration is needed regarding the restriction of overseas subcontractors/EPWs as it will not always be clear to the claimant where the services are being performed, or if the EPW is taxed under a UK payroll. This could make the claim process onerous for smaller companies and/or for those regularly using outsourced providers.
With regards to tackling the abuse, the proposal seems largely sensible with the exception of the advance notification for claims, where there is still considerable uncertainty how this would operate without disadvantaging some genuine claimants.
HMRC has suggested that notification may be required in advance of the year in which the claim relates, providing an opportunity to flush out potentially spurious claims before they are progressed. However, this could also lead to a number of first time or one-off claimants being unfairly excluded from making a claim simply because they would not become aware of their eligibility until it is already too late to claim, given that the rest of the tax return and computations are prepared retrospectively.
Further details are set to be announced in the Budget this coming autumn. Significant changes are clearly afoot, so it will be important to ‘watch this space’.
For more information on how the R&D tax reform will affect your company, please contact Jemma Vaughan, Hazlewoods Director, on 01242 680000 or at firstname.lastname@example.org.