The Finance Bill 2023 is due to come into effect on 1st April 2023 which contains legislative changes that will affect technical aspects of the R&D Tax Relief (SME) and RDEC schemes. Since the draft legislation was published in July 2022, HMRC has considered stakeholder feedback and released draft guidance that seeks to demonstrate how the reforms will impact businesses claiming R&D tax relief. The legislation will be applied to companies making claims with accounting periods beginning on or after 1st April 2023.
If you have comments about how the draft guidance will impact your business, submit your feedback to email@example.com before the 28th of February 2023 deadline.
We’ve commented previously on the proposed changes, however we feel it is worth revisiting the major points in the run up to April.
HMRC has long been concerned about businesses claiming costs for subcontractors based outside of the United Kingdom. From 1st April 2023, R&D activities carried out by contractors must take place in the UK for costs to be included in tax relief calculations, unless expenditure meets the definition of ‘qualifying overseas expenditure’ (QOE). QOE is based on three factors which must all apply to any given activity:
- The conditions necessary for the R&D are not present in the UK (e.g. geographical, environmental, social, regulatory).
- The conditions are present in the location where the R&D is undertaken.
- It would be ‘wholly unreasonable’ to replicate the conditions in the UK (e.g. volcano).
If cost or availability of workers is the only, or main reason, for carrying out work abroad it will not justify the activity being QOE. UK-based subcontractors, or ‘externally provided workers’ (EPWs), must be subject to PAYE and national insurance contributions for costs to be classed as qualifying expenditure. We’re yet to receive confirmation but expenditure associated with EPWs who extract funds through dividends is likely to be excluded from the scheme.
Data Licences and Cloud Computing Services
For accounting periods starting on or after 1st April 2023, the cost of data licences or cloud computing services will be considered as qualifying expenditure so long they contribute to the resolution of scientific or technological uncertainty.
There are factors to consider that will exclude these costs from qualifying expenditure. For example, if the business has a contractual right to sell, share or publish data for commercial gain which would, in effect, enable the business to recoup the cost.
We welcome the widening of scope and reduction of ambiguity surrounding the inclusion of data, cloud computing and pure mathematics costs in R&D tax relief claims. Cloud computing and innovation are becoming ever more entwined, as such the changes will lead to new opportunities for tech firms operating at the apex of computing.
Claim Notification Form (CNF)
For accounting periods starting on or after 1st April 2023, some businesses will need to inform HMRC in advance should they wish to submit a valid R&D claim. Claimants that will need to submit a CNF in advance are:
- first time R&D tax relief claimants
- claimants who have not made an R&D claim in any of the previous three calendar years.
HMRC’s draft guidance states that the earliest date a CNF can be submitted is the first day of the accounting period, and the latest is 6 months following the period of account that includes the relevant accounting period.
The CNF will require claimants to submit additional information including an internal R&D contact who is responsible for the claim and details of tax agents involved in the claim.
Additional Information Form (AIF)
Once it is made available on gov.uk in April 2023, the AIF must be submitted before or at the same time of an R&D tax relief claim. The AIF contains a lengthy list of required information, most of which claimants and tax agents should be already familiar with.
The AIF list includes a separate figure for qualifying indirect activities (QIA), a recommended number of projects (for technical reports) to cover total expenditure, and PAYE references for externally provided workers (EPWs).
If you have any questions about the reforms, R&D tax relief in general, or how to make a claim, contact our tax professionals on 0161 904 0044 or firstname.lastname@example.org.