This Easy R&D update covers the key changes that are coming in April 2023 with new rules on what qualifies as eligible expenditure, new restrictions on claiming overseas R&D costs, and the need for all claims to be made digitally, with greater transparency around the R&D tax advisers involved in any claim.
The good news coming from these latest updates is that it will be possible to claim for new categories of qualifying expenditure, with data, cloud computing, and pure mathematics R&D costs becoming eligible.
Currently, companies making an R&D claim under the SME scheme rules can include relevant R&D costs related to:
Although data and cloud computing costs will join this list becoming allowable expenditures from April 2023, which is a significant positive change, care must be taken. To be eligible for tax relief, these types of costs must be linked to the R&D activity. There are restrictions covering where a company will have the right to sell, publicise, share or communicate the data to third parties for commercial purposes, other than R&D.
Further, when considering whether there is an ‘advance’ in a field of science or technology, the guidelines will be updated so pure mathematics will be eligible. This is expected to benefit those companies driving innovation in the AI and robotics space.
Additionally, assuming the Health and Social Care Levy goes ahead, the relevant legislation will be updated in 2023, so that this employer expenditure becomes an allowable cost for R&D tax relief. Until April 2023, this levy has been implemented through a temporary 1.25% increase to National Insurance rates – these additional NI costs and the impending Health and Social Care Levy can both be claimed for R&D tax relief.
The good news is this change in National Insurance and the new Health and So-cialCare Levy has minimal impact on the claim process, as the net impact on the total costs that can be claimed is unchanged. We are watching the news of the Conservative party leadership election with interest as the new Prime Minister may announce changes to the National Insurance and Health and Social Care Levy once they are in their new role.
From April 2023, there will be additional restrictions on what can be claimed via the R&D tax relief scheme for SME companies. Currently, subcontractors and externally provided workers can be included in a claim no matter where in the world they carry out their duties. However, in a deliberate attempt to refocus R&D investment toward the UK market, this will no longer be the case.
From April 2023, any costs for these categories of expenditure, where the work is conducted outside the UK, will no longer be allowable in an R&D tax relief claim. There are exemptions where non-UK input is required due to exceptional circumstances, for example, if the conditions required for the R&D only exist outside the UK. However, any offshored R&D work that was contracted because of differences in cost or availability versus the UK, has not been deemed an exception in the draft legislation. We believe it is likely that this legislation will be passed.
This change is likely to have a significant impact on companies that rely on foreign subcontractors for R&D. For instance, we have many clients who use overseas software development houses for aspects of their R&D. These companies are likely to see a significant reduction in their R&D tax relief claim if they maintain their current overseas subcontracting strategies.
While it is important to be aware of these changes, we do not believe the ‘tax tail should wag the dog’. We would always recommend that any decision on the location of R&D work should primarily be driven by operational and commercial factors, with R&D tax relief as a secondary consideration.
To improve compliance with the R&D tax relief scheme rules, HMRC is introducing a new set of filing rules.
Firstly, from April 2023 all claims must be made digitally. At Easy R&D, every claim we file is already filed digitally, so the impact on our clients will be minimal. However, for some claimants, this change will be a marked departure from their previous process.
Also importantly, from April 2023, the name of any R&D advisers must be included on a tax return. In parallel, a senior member of the claiming company will have to sign off the R&D cost pages. HMRC has confirmed that this change does not create any additional personal liability, beyond the liabilities in existing law. The change is designed to ensure the claimant company understands what an R&D advisory firm is recommending that they claim.
At Easy R&D, we welcome this change. Ensuring that R&D advisers are properly explaining, to their clients, the relief and what is being claimed is an important part of a professional adviser's role.
Finally, perhaps the biggest change, and one which we believe will likely have the greatest impact, is the new requirement to notify a claim in advance.
Currently, a company has two years from the end of its accounting period to make a claim. If a company has an accounting period ending on the 31st of December each year, for the year ended 31st December 2020 that company can make a claim for R&D tax relief until 31st December 2022. However, under these new changes, if the company has not previously claimed it will need to notify HMRC, within 6 months of the year-end that they intend to claim. In practice, this will mean companies that haven’t claimed before, will lose 18 months to discover they are entitled to be claiming these reliefs before their claim window is closed.
This change may have been designed by HMRC to reduce fraudulent claims. However, we believe this change is unlikely to reduce erroneous claims. Claimants who are determined on abusing the scheme, will likely be aware of these requirements and work around them. Whereas a company carrying out significant R&D, but that has been poorly advised or is unaware of the scheme, will simply lose out on money that previously they were entitled to claim.
Whilst the legislation has set out the deadlines for notifying HMRC of intention to claim, it leaves unclear what the notification must include. HMRC has been given wide powers to state what information must be included in that notification and the form it must take; we are still awaiting details of what the notification requirements may be.
Given the number and potential impact of changes that are coming next year, we recommend discussing any questions or concerns with your R&D tax adviser.
If you are an existing Easy R&D customer and you want to talk to your customer success manager, or if you are interested in discovering how Easy R&D can help you to navigate the new legislation, while optimising your claim please do get in touch.
Every customer and every claim we work with benefits from our deep expertise in how HMRC manages R&D tax credit applications.