R&D Tax Reliefs: Consultation Outcome and Upcoming Changes
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Last week HMRC published the long-awaited results of its review of R&D Tax reliefs in the UK, alongside more details of the upcoming changes to the R&D tax relief scheme that were announced in the Autumn budget. We were, of course, very interested in what they had to say, and especially in what form the previously announced changes would take!
Before we get into the details of the consultation outcomes, here are the headline changes that are expected to come into force in April 2023.
First of all, HMRC has proposed a raft of small changes aimed at reducing abuse of the scheme, all of which on the face of it seem sensible and proportionate. Abuse of the scheme is something we’re very concerned about at WhisperClaims, so it’s great to see HMRC doing something to tackle this! The proposals are as follows:
- All claims for R&D tax relief will have to be made digitally
- More details will have to be provided about each claim, including about what advances were made, what field of science and technology the work took place in and what uncertainties were overcome.
- All claims will have to be endorsed by a named senior officer of the company
- Companies will have to inform HMRC in advance of making a claim
- All claims will have to include the names of any agents involved in compiling the claim
Overall, we’re very pleased to see these changes being brought in, although there’s still a huge amount of ambiguity related to how all of this will work in practice. Further details are expected in summer of next year.
Refocusing the reliefs towards innovation in the UK
The decisions made here will be very disappointing to a lot of claimants, and in fact are in direct contradiction to the outcomes of the consultation. The currently proposals mean that from April 2023:
- Subcontractor costs will only be allowable if the work is carried out in the UK
- EPW costs will only be allowable if the workers are paid through UK payroll.
This will be a huge blow to any company using, for example, overseas developers to carry out their R&D, as none of these costs would now be allowable, no matter how the work was arranged. This is expected to hit software start-ups the hardest, especially as many of these companies will already have been affected by the PAYE cap.
Cloud computing costs
This was a bit of a disappointing one – when the Government announced that cloud computing costs would be allowed, we had hoped that this would enable companies to claim for any cloud-based apps that supported their R&D. However, the only new categories of allowable expenditure will be as follows:
- Licence payments for data sets
- Cloud computing services used directly for R&D, for example costs which can be attributed to computation, data processing, analytics and software.
Where payments to cloud-based software providers are made, HMRC expects claimants to split these into the directly R&D-related elements and other costs that would not be allowed, such as costs related to storage. It is still seeking views as to the feasibility of this approach – from what we can see, this might be very tricky!
Alongside these headline changes, a few other, more minor changes have been announced. These don’t materially change the content or submission of claims, but tweak the rules around viability of companies and submission dates for companies in certain niche scenarios.
Given the level of ambiguity about how these changes will be implemented, and the Government’s call for feedback which might lead to changes, we’ll make sure to keep ourselves up-to-date and release updates as soon as we have anything new to tell you!
March’s consultation was wide-ranging, covering everything from the structure of the scheme to what costs should be allowed and how the scheme should be policed. 183 responses were received, from individuals, accountants, agents and industry bodies, far more than have responded to other recent R&D tax related consultations.
Overall there was a lot of consensus in the responses, and very few surprises. We were also pleased to see that, in general, WhisperClaims’ response to the consultation was in line with most of the rest of the sector. Here are some of our highlights:
Consolidation of the schemes: respondents who were in favour of consolidating the scheme cited the complexities introduced by the different rules and the complexities of calculating SME tax relief versus RDEC as their reasons for supporting this. Those against consolidating the scheme expressed concerns about any resulting reduction in tax relief for SMEs.
Information provided at the time of claiming: There was little consensus about whether HMRC should mandate what information is provided at the time of claiming. As noted above, the Government has decided to require companies to provide more upfront information from April 2023.
Use of Agents: Companies using thirds-party advisors to prepare their claims cited the complexities of the scheme as a reason for doing this. There was strong support for measures to improve the quality of claims, including identification of agents involved in claims and requiring companies to sign off on claims, both of which have been recently proposed by the Government. In addition, there was strong support for accreditation of R&D agents.
Improving how claims are dealt with: Several respondents suggested that a minimum expenditure per claim could be introduced to reduce the number of claims made and therefore enable HMRC staff to spend more time on larger claims. Those of us who’ve been doing this for a while will remember that, up until March 2012, the minimum spend on an R&D claim was £10,000, but this was removed to enable more smaller companies to claim!
Expanding the scheme: The majority of respondents were in favour of expanding the scheme to allow claims to be made for pure mathematics, some areas of social science and some creative industries.
Using the scheme to incentivise certain research: Respondents were equally split on the question of whether R&D relief should be increased for certain sectors, such as green technology, or reduced for other sectors such as oil and gas, in order to encourage specific types of R&D. Many companies felt this would be of value, whereas others expressed concerns about how this would increase complexity and reduce compliance.
Overseas contracting: Overall, the respondents felt that overseas subcontracting is a valuable part of a lot of R&D carried out in the UK, and should be an allowable cost. They also expressed concern about the additional complexity that would be introduced by disallowing overseas costs, especially if specific exemptions were to be introduced. As noted above, the Government has proposed excluding overseas subcontractor costs from R&D claims from April 2023.