R&D tax reliefs have supported hundreds of thousands of businesses to invest in innovation by cutting the amount of tax that they pay.
However, from 1 April next year, there will be several changes to the rules surrounding R&D, which could affect how much relief you can claim.
Expand eligible expenditure to data sets, cloud computing and pure mathematics
Businesses will be able to include the costs of purchasing data for R&D projects or using cloud computing services.
This will allow businesses that pay licence fees to rent cloud computer storage space or pay for data costs in the pursuit of R&D to build this expenditure into their claims.
These areas will now come under the R&D qualifying expenditure umbrella and R&D for tax purposes will now also include pure mathematics.
Many businesses will benefit from this change, particularly in the fields of technology and media, which could help to mitigate losses from the restrictions on overseas R&D costs.
Restrictions on overseas claims
R&D reliefs will be focused on the UK from 1 April 2023. This means that subcontracted R&D work and the cost of externally provided workers (EPWs) will be limited to work undertaken in the UK.
The Government has indicated that it does not want to introduce a rule that discriminates against businesses that cannot practically carry out research in the UK.
A list of exemptions is being worked on which will be tied to environmental, geographical, legal or regulatory reasons that would prevent R&D from taking place in the UK.
There may also be an exemption for certain specialist skills, such as consulting world-leading experts in a particular field.
At present, the draft legislation does not change the ability to claim for expenditure incurred by an overseas branch of a UK company.
Cracking down on abuse
HMRC has voiced concern over certain R&D claims and has allocated an additional 100 inspectors to deliver greater scrutiny.
It has also introduced tougher rules, which include:
- Claims must be made digitally
- Categories of qualifying expenditure incurred should be disclosed and brief details of the R&D activities provided
- A senior company officer must endorse the claims
- Claims must include details of any agent who has advised the company on it
- Companies must inform HMRC in advance of their intention to make a claim within six months of the end of the accounting period to which the claim relates.
On this final point, the ICAEW has raised concerns that in some circumstances it might prevent businesses from making a valid claim.
This is because it shortens the timeframe in which companies need to determine whether they have a valid claim.
However, in an exception to this rule, if a company has made an R&D claim in one of the preceding three periods it will not need to pre-notify.