Recent announcements include a delay to the implementation of restrictions to overseas expenditure to 2024, and confirmation that the new additional information form will be mandatory for claims submitted from 8 August 2023. More detail on these changes is provided below.
Evelyn Partners R&D Incentives Advisory team are participating in the consultation process and are in regular communication with HMRC and Treasury policy representatives. Should you wish to discuss any of the proposed changes, please speak to any of the Evelyn Partners R&D tax contacts listed.
Mandatory additional information form for claims submitted from 1 August 2023
1. Additional information required to support a claim
A surprise announcement was the earlier than expected requirement to submit the Additional Information form for all claims submitted from 1 August 2023 through HMRC’s tax return portal. Given the short notice of the mandatory date for using the form, many claimants may be forced to change their claim process “in flight” to meet the new reporting requirements.
Claimants will be required to submit project descriptions and a more detailed breakdown of qualifying expenditure, using the online form, covering projects totalling at least 50% of the qualifying expenditure and for up to a maximum of 10 projects. If claims are only being made in respect of 1-3 projects, descriptions will need to be provided for each- of them.
While it has always been considered best practice to submit a claim report, including example project descriptions and detailing the claim approach, the new legislation will define what financial and technical information must be provided on the new online form. It will be possible to also provide a separate R&D claim report, and this will be advisable in many cases due to the lack of information on the claim process currently captured by HMRC’s online form, and which should be of value to HMRC when reviewing a claim.
The online form requires the following information:
- a breakdown of the qualifying expenditure by the extended range of qualifying categories (for example, now including data licences and cloud computing services costs);
- the number of externally provided workers (EPWs) who worked on the projects;
- the PAYE scheme reference for those EPWs;
- the quantum of costs claimed as qualifying indirect activities (QIAs)
- the number of projects claimed for; and
- a description of the projects
Delay to the restrictions on overseas R&D expenditure
2. Restrictions to overseas expenditure
A delay to the previously announced intention to restrict qualifying R&D expenditure to activities undertaken in the UK has been confirmed. It is now expected that the restriction will take effect for accounting periods starting on or after 1 April 2024.
With the aim of focussing the reliefs on R&D activities undertaken in the UK, once introduced, companies will no longer be able to claim expenditure on externally provided workers and subcontracted R&D based outside of the UK. Based on current draft legislation, exceptions to the restriction will only be available where it would be considered “wholly unreasonable” to replicate the activities in the UK, however the exceptions are yet to be clearly defined.
As currently proposed, the restriction on overseas expenditure will have a significant impact on claimants that make use of an international workforce to support and augment UK led R&D projects.
Changes taking effect for expenditure incurred on or after 1 April 2023
3. Reduction in the rates of R&D relief for SMEs
From 1 April 2023, the additional deduction of qualifying R&D expenditure available for SMEs will reduce from an additional 130% to 86% and the cash credit available for loss making companies will reduce from 14.5% to 10% of the surrenderable losses. The relative reduction in R&D benefit resulting from these changes is dependent on tax rate and whether the company is in a profit or loss making position, however the reduction could be up to 50% under some scenarios.
The significant reduction in R&D relief for SMEs follows negative publicity around abuse of the SME relief, the number of perceived erroneous claims and analysis that suggested the SME scheme is less effective than the large company RDEC scheme in encouraging additional R&D investment.
4. Increase in the rate of R&D Expenditure Credit (RDEC)
From 1 April 2023, the RDEC “above the line” credit rate will increase from 13% to 20%. RDEC is available to large companies that exceed the group staff, turnover or asset limits of the SME scheme, and to SMEs claiming R&D that was subcontracted to them by a large company or otherwise subsidised. For companies paying the full 25% CT rate, this results in a net of tax benefit increase from 10.53% to 15%.
5. Additional support for “R&D Intensive” SMEs
To provide some respite to the reduction in the main rate of relief for SMEs the Government announced an increase to the payable cash credit for loss making “R&D intensive” SMEs. In effect this reverts the payable cash credit rate back to 14.5% for loss making SMEs with an R&D intensity of at least 40% of their total expenditure. To prevent manipulation of the intensity ratio, in calculating the ratio the qualifying R&D expenditure and total expenditure of connected companies will be aggregated. Whether or not companies are connected will be determined according to CTA 2010 section 1122.
While the additional support will take effect for expenditure incurred from 1 April 2023, until the legislation is published, companies will not be able to make a claim for the higher rate of credit. Draft legislation for this new relief will be published in the summer of 2023, and legislation included in the following Finance Bill. Companies may need to submit amended returns or delay making their claims to access the higher rate of relief.
Changes taking effect for accounting periods beginning on or after 1 April 2023
6. Extension to the categories of qualifying expenditure to include Cloud and Data costs
As part of an aim to modernise R&D tax relief to align with changes in R&D practice, expenditure on cloud services and the acquisition of data, to the extent it supports qualifying R&D, will be claimable. The change is widely welcome as a long-awaited extension to the previously narrow and slightly outdated range of qualifying expenditure categories.
The change will benefit the majority of companies that have moved from the traditional model of purchasing software licences and investing in “on-premise” infrastructure, towards purchasing cloud services to support R&D. Allowing expenditure on data to facilitate R&D will benefit companies purchasing large, often costly datasets to support R&D, for example in relation to training machine learning models.
7. Claim advanced notification
For accounting periods starting on or after 1 April 2023 some claimants will need to submit a Claim Notification form for their R&D claim to be valid, within 6 months of the relevant accounting period end. The original intention was for this form to apply to companies who are first time R&D claimants or those who have not made an R&D claim in any of the previous 3 calendar years.
The draft legislation states that the required information will include:
- the unique taxpayer reference (UTR) number of the company
- contact details of main R&D contact at the company
- contact details of any agent involved in the R&D claim
- agent reference number (if available)
8. Removal of exclusions to restrictions to mathematics as a contributing activity and qualifying advance under the BEIS Guidelines
Recognising the growing volume of R&D being undertaken that is underpinned by mathematics, the definition of R&D for tax reliefs has been expanded to include all mathematics. In particular, it clarifies that ‘pure maths’ can qualify. The guidance on this change needs to be clearer, however, it is hoped that this will remove the ambiguity relating to claiming mathematical activities that support or underpin R&D projects, such as is common in data science, machine learning, algorithm development and many other science and engineering disciplines.
Additional changes and ongoing consultations
9. On 31 January 2023 the House of Lords Committee published their report on research and development tax relief and the R&D expenditure credit, key observations and recommendations included:
- Legislative changes within the draft Finance Bill 2022-23 are not effective in isolation and improvements to HMRC’s compliance capability are also required. This includes a more focused and targeted approach to identifying suspect claims, and greater expertise and resource within HMRC.
- Fraud and error could be mitigated before claims are made if HMRC improved the support it provides to businesses. This includes both its guidance and communications to increase understanding of the scheme and expanding its existing Advanced Assurance process for claims by small and medium enterprises (SMEs).
- That the Government introduces some form of transitional relief for expenditure on specialised resource, which is not available in the UK, particularly for contracts which have already been entered into.
- BEIS and HMRC should work together on a new awareness campaign aimed at providing SMEs with accurate information about what is, and as importantly, what is not R&D.
10. Consultation on a single R&D scheme
On 13 January 2023, HM Treasury issued a consultation document seeking comments on a planned single R&D tax relief scheme to replace the separate SME R&D tax relief and large company RDEC scheme.
It is currently the Government’s intention that, if implemented, the new scheme will be in place for expenditure incurred from 1 April 2024. The new scheme is likely to be modelled on the RDEC scheme’s “above the line” credit model, in which the credit is accountable as additional income. This has a positive impact on EBITDA and therefore a more tangible impact and greater likelihood of increasing R&D activities.
Key discussion points on the single scheme include:
- Whether SMEs should still have a higher rate of relief relative to large companies
- In the event that R&D is subcontracted, which company should be able to claim the R&D relief
- Which PAYE/NIC cap on the credit and cashback should be adopted.
Approval code: NTAJ14052334
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.