In November 2021, HMRC released their R&D Tax Reliefs Report on the back of announcements made in the Autumn budget. R&D Tax relief claims would face serious reform, with key proposals including:
In short, the HMRC have acknowledged a rise in spurious claims brought about through ‘here today, gone tomorrow’ R&D advisors, as well as recognising the need to include modern research methods as more companies look to data and the cloud as a means of growth.
Let us break down what these key proposals mean and how your business can make use of them.
Look to the cloud
Going forward, any cloud software or servicing costs that are directly used for the purpose of R&D will be eligible for relief. Costs like computation, data processing and software are all expected to come under this bracket.
Before you go and invest a fortune into cloud storage and server farms, be aware that these are likely to fall out of the bracket due to them being attributed to overheads and rental charges.
The Government is keen to listen to ways that billing could be split to ensure that only the correct costs are claimed for, so it seems that there is some wiggle room in their definition.
Likewise, Datasets will also become an eligible relief, although there will be strict criteria around it. For example, licences for datasets used only for R&D activity will be considered. Datasets that have a resale or lasting value beyond R&D will not be considered.
Staffing costs for the collection of datasets are also eligible, although they are once again restricted to use for R&D activity only. The Government intends to make this clear via revised guidance in the future.
Whilst it is a positive step that datasets and cloud services are finally being considered, there is still work to do in setting out the true scope of eligibility.
Innovation in the UK
One of the main concerns the HMRC has in regard to R&D claims is that a significant element of the qualifying expenditure on which relief was being given was being paid to overseas subcontractors diluting the economic benefit to the UK.
The Government has therefore proposed to restrict R&D relief to amounts paid to subcontractors whose activities take place in the UK. Likewise, for companies who claim expenditure for externally provided workers (EPWs), these will be restricted to those EPWs who are paid through a UK payroll – i.e. they are subject to UK PAYE and National Insurance contributions.
Software and consumables sourced overseas, as well as payments for clinical trial volunteers and payments for data and cloud-sourced overseas, will still be able to claim R&D tax reliefs as they are considered inputs to activity in the UK.
While the Government is focused on relief toward UK innovation, they are open to hearing from stakeholders about areas for exceptions.
Compliance is key
There are growing concerns that R&D claims are subject to abuse, whether that be through false claims or poor-quality ones via advisors with little to no tax knowledge, or a disregard for the rules to increase their fees. This has led to criticism of the HMRC for not adequately controlling risk.
Here are a few of the ways that the Government is intending to curb such claims:
These are just the start, with the Government considering further measures to limit the number of unscrupulous claims. Again, they are open to feedback on measures and guidance on ways to implement these measures.
When can we expect these measures to come into play?
Draft legislation is expected for Summer 2022 for inclusion in the Finance Bill 2022/23 once the proposals have been subject to further consultation. Commencement will likely be targeted for April 2023.
I sat down with our Tax Director, Andy Wilson, to discuss his thoughts on the proposals and whether he thought they would make a difference to the number of spurious claims. He said:
On the whole I am in favour of the proposed reforms. We prepare lots of claims for technology companies who spend large amounts on things like datasets and cloud computing as part of their R&D activities and it’s a frustration that these costs don’t presently qualify for R&D relief.
I also welcome the closer scrutiny and additional compliance requirements for R&D claims as there is little doubt that there are now lots of poor quality “advisors” mass marketing R&D tax relief and dangling large tax refunds in front of potential clients without ever having spoken with them to understand what they do and what their eligible costs may be. This can only lead to the conclusion that these firms are focussing purely on maximising their fees rather than using the relief as it is intended.
If this abuse was not tackled there will come a time where HMRC become so distrustful of any claim that the relief will be abolished which would have a hugely detrimental impact not just on those companies who make genuine claims but also the economy as a whole.In reality, we at Ascendis will not have to change our approach to R&D claims to any great extent as we already provide HMRC with a detailed report for every claim which clearly sets out the advance being sought, the uncertainties faced and the costs incurred as our view has always been that this is the best way to ensure that the client’s claim is processed quickly by HMRC and they do not have to come back to us asking for additional information.
For more information on R&D relief and how you can claim back your expenditure, contact us today.
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