Matthew Jones, Managing Director at LimestoneGrey, discusses the upcoming changes to research and development (R&D) tax credit relief, why they have been implemented and how they will impact your business.
Whether you’re a company developing new technologies to enhance patient outcomes or your business focusses on refining an existing product or service to improve efficiency, you are likely entitled to R&D tax credits.
R&D tax credits allow UK-based companies to receive either corporation tax reductions or a cash credit. However, the UK Government has confirmed a suite of measures to reform R&D tax credits, this includes:
- Expanding the qualifying expenditure to support modern research methods
- Refocusing support towards innovation taking place in the UK
- Targeting abuse and improving compliance
It is claimed that these changes will help to keep the UK as a competitive place for cutting-edge research, ensure R&D tax credits remain fit for purpose and help effectively use taxpayer money to promote innovation.
But what do these changes mean in practice and how will they affect your business? Let’s explore the proposed changes.
Inclusion of data and cloud computing costs
There are currently six categories of qualified expenditure including software, which only cover downloadable software for undertaking specific R&D activities.
The changes see data and cloud computing costs now included. This helps to increase incentive for using the relief for cutting-edge R&D methods that rely on vast quantities of data and are analysed, processed and hosted via the cloud.
The below costs will be included in the qualifying expenditure mix:
Licence payments for datasets
Cloud computing and software
This is a step in the right direction to ensure that the relief is fit for purpose for modern research and development techniques. How companies conduct R&D has vastly changed since the scheme’s introduction back in 2000, so it is only right that the relief evolves too.
Refocussing innovation in the UK
The Government is making the following changes to R&D tax credit relief to encourage research and development activities to take place in the UK:
- Restricting the claimable options for subcontracted R&D
- Restricting the claimable options for externally provider worker payments (EPWs)
This means that companies who subcontract R&D tasks to a third party in future can only claim relief for expenditure where the third party does this work in the UK. For EPWs, companies can only claim relief on such expenditure where those workers are paid through a UK payroll.
It is no surprise that the Government has called for change in the way overseas subcontracted R&D is handled in terms of tax credit relief. The Chancellor has repeatedly expressed his concern that the UK needs to better match the global competition in science and innovation, and this proposed change aims to retain the knowledge created from research and development projects in the UK. However, it will badly penalise companies that need expertise which does not exist in the UK and stifle international collaborative R&D.
Companies that spend on overseas subcontracted activity will need to review their future R&D plans and take advice from a qualified R&D tax credit expert to ensure that they are making the best decisions for their business going forward.
Tackling fraudulent activity and abuse
Qualified professionals have some concern over the abuse and fraud of R&D tax credits from a small minority.
There are two key areas that the government are focusing on to tackle this:
- R&D tax credit relief is claimed by companies in their corporation tax return. However, the current process presents a variety of risks for abuse. For example, loss-making companies who have no turnover/income can still receive a payable cash benefit, making this attractive for possible abuse by fraudulent companies.
- There has been a rise in unregulated R&D consultancies and advisers who are not members of any professional industry bodies. As these advisors do not have the qualifications to support their offering, a pattern has emerged whereby they use clever marketing and business development techniques to reach out to SMEs and sell them the dream of claiming back substantial amounts of money through R&D tax credit relief. Unfortunately, these activities can be performed by anyone, many with no background in tax and potentially with an impressive sales background. For SMEs who are new to the system and unfamiliar with the process, these tactics are incredibly powerful.
There are already measures in place to fight fraudulent activity in the industry. However, further rules and regulations are being introduced such as providing more technical detail, submitting claims digitally and ensuring the claim is endorsed by a named senior officer of the company.
The UK Government have added extra processes for anyone R&D tax credits. For accounting periods beginning on or after 1st April 2023, any company wishing to claim R&D tax credits must electronically notify HMRC within 6 months of the end of the accounting period. A company will be exempt from notifying if it has made a claim in any one of the three preceding periods.
This means that if a company fails to notify HMRC within this time, they will be unable to make an R&D tax relief claim, even if they have performed qualifying R&D activity. This will penalise any company that does not have access to good R&D tax relief advice. It will also prevent companies who are new to R&D tax credits (and have therefore not made an electronic notification to HMRC) from going back up to three years to claim relief on past R&D activities. Therefore, it is imperative that any company potentially wishing to make a claim in the future notifies HMRC of its intention, even if later it decides not to submit a claim for that period.
What are the next steps?
These changes will take effect from April 2023. Companies need to understand the implications of these changes and the impact they could have on their future R&D tax relief claims.
Going forward, a named representative of the company will need to put their name to the claim; therefore, they need to be confident that the claim has been prepared correctly. In addition, as it will also be necessary to name the R&D consultancy used, unscrupulous advisers won’t be able to hide behind their clients’ accountant who often must file on their behalf. It is important that you choose a regulated consultancy with tax qualified advisers, as HMRC will be able to identify any claims prepared by unscrupulous advisers.
If you would like further guidance on how these changes may impact your business, please feel free to contact LimestoneGrey.
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LimestoneGrey is a leading specialist R&D tax relief consultancy. As a regulated practice, we provide companies with specialist advice to ensure that R&D claims are prepared correctly and are fully optimised. Thanks to our vast experience in R&D tax credits and the wider accounting landscape, we understand the tax legislation and HMRC practices, along with how an R&D tax credit claim can impact wider areas of your business. To find out more about them then please visit our website.