HM Treasury yesterday released details of the long-awaited outcome to the Consultation on the potential reform of the R&D tax incentives, which was launched at the Spring Budget 2021. Some reforms were trailed in the Chancellor’s Autumn Budget speech, but the document published on 30 November 2021 provides the full details and next steps. There are three key points arising from the Consultation, as follows:
- Extension of qualifying expenditure to include data and cloud costs from April 2023. However, there are some limitations on the extent to which such costs can be included in a claim, which may be more restrictive than might have previously been envisaged.
- Limitation of qualifying expenditure to activities undertaken in the UK, with effect from April 2023. This relates both to payments to subcontractors, whose activities must take place in the UK to be eligible for additional R&D tax relief, and also to other workers, whose costs will only be eligible for additional R&D tax relief if they are paid through a UK payroll. Companies that currently outsource some of their R&D activities overseas will therefore need to consider whether it might potentially be more beneficial instead, to use UK subcontractors and workers if this change is enacted as proposed.
- Measures to improve compliance. In order to combat perceived abuses of the R&D tax incentives and to improve compliance, a number of measures are planned which should take effect from April 2023:
Claimant companies will need to inform HMRC in advance of their intention to make a claim;
All claims will in future need to be made digitally online;
More detail will be required to be presented in claims in future regarding eligibility and expenditure claimed; and
Each claim will need to be endorsed by a named senior officer of the company.
The proposed changes may not be as radical as might have been expected in view of some of the suggestions put forward for comment at the Consultation exercise, but, nonetheless, they signal an important shift in approach.
In the context of HMRC’s recent recruitment of a substantial number of additional Inspectors to review R&D tax relief claims, it is expected that claims will undergo a significantly greater degree of scrutiny moving forward. It is important that claimant companies ensure that their claims are well prepared, with sufficiently robust support.
If you would like to read the Consultation report in full, click here.
For further details and tailored advice, please contact Partner, David Clift at david.clift@hazlewoods.co.uk, or Director, Jemma Vaughan, at jemma.vaughan@hazlewoods.co.uk, or call 01242 680000.