At the Spring Budget 2021, the government launched a review of the R&D Tax Relief (SME) scheme aimed at ensuring the scheme remains competitive and continues to offer good value for the taxpayer.
In addition to targeting abuse and improving compliance, the reforms proposed from the review and consultation focus on limiting support for innovation outside of the UK and expanding qualifying expenditure.
The government plans to include the reforms in Finance Bill 2022-23 which will take effect from April 2023.
Main changes to the R&D Tax Relief (SME) Scheme
1. Data and cloud computing costs
The government has recognised that datasets and cloud computing are important R&D inputs for companies in many sectors.
To that end, new categories of R&D expenditure have been brought into scope, along with caveats:
- Licence payments for datasets – so long as the data cannot be resold or has lasting value beyond the duration of the project.
- Cloud computing costs associated with computation, data processing, analytics, and software – general overheads relating to cloud server rental costs or data storage remain out of scope.
The government has stressed that staffing costs for creating datasets for use as part of R&D projects remain inside the scope. This includes staff costs for collecting, cleansing, and analysing data provided they are incurred for a qualifying R&D project. The government will create revised guidance to make its position clear.
2. Refocusing R&D tax relief towards innovation in the UK
Under the current guidance, companies are permitted to claim relief on subcontracted R&D activity that is conducted overseas. The government seeks to change this in 2023 and refocus reliefs towards innovation performed within the UK’s borders.
The government intends to disqualify expenditure where R&D activity is subcontracted to an overseas third party. However, R&D tax reliefs may still be claimed for the cost of software, data, cloud, and consumables sourced from overseas.
Companies can continue to claim for subcontracted R&D costs so long as the activity is performed in the UK.
3. Abuse and compliance
The government has become increasingly concerned regarding the rise of boundary pushing and abuse involved in R&D tax credit schemes over recent years. National Audit Office estimates that fraud across both SME and RDEC schemes accounts for 3.6% of total relief, or £311 million. The rise of abuse has coincided with the emergence of unscrupulous R&D advisers that submit dubious claims without the due diligence required by HMRC.
HMRC has already invested in additional resources targeted at ensuring R&D tax relief compliance and to gain a better understanding of the scale of error and fraud.
The government intends to make the following changes as part of Finance Bill 2022-23 to address abuse and boundary pushing:
- All claims to the R&D reliefs – either for a deduction or a tax credit – will in future have to be made digitally (except companies exempt from online tax returns).
- Digital claims will require more detail. For example, what expenditure the claim covers, nature of technological advancement sought, uncertainties overcome.
- All claims will need to be endorsed by a senior officer in the company.
- Companies will need to inform HMRC, in advance, that they plan to make an R&D claim.
- Claims will need to include the details of R&D agents who have advised the company.
The government believes these changes will help to protect the integrity of reliefs and reduce the risk of error and fraud in the future.
Cost Care Tax is ahead of the curve and is confident the changes will have an immaterial impact on our ability to serve our customers. Our technical reports already provide a comprehensive project overview and clearly detail how R&D activity satisfies HMRC criteria, particularly in terms of advancements sought and how technological uncertainties were tackled.
The changes described above are by no means set in stone. The government welcomes views from stakeholders which it will consider in the next stage of the review.
How the principles could be reflected in legislation and implemented are up for discussion prior to the publication of draft legislation in summer 2022, before the Finance 2022-23 Bill is brought to parliament.
As always, we will update our website and contact our customers/partners directly once the government completes the next stage of its review.
To contribute your views to the government, please send written submissions to RDTaxReliefs@hmtreasury.gov.uk by the 8th February 2022.
If you have any questions about the existing reforms, R&D tax reliefs in general, or how to make a claim, contact our tax professionals on 0330 128 0044 or firstname.lastname@example.org.