In the Spring Budget 2021, the government launched a review of the R&D Tax Relief (SME) scheme. The review was aimed at ensuring the scheme remains competitive and continues to offer good value for the taxpayer.
The government has stated that they have become more and more concerned with the increase in ‘boundary pushing’ and abuse involved in R&D tax credit schemes over recent years.
The National Audit Office estimates that fraud across both SME and RDEC schemes could be as high as 3.6% of total relief, or £311 million.
In addition to targeting abuse of the scheme and improving compliance, the reforms proposed by the review focus on limiting support for innovation outside of the UK and expanding qualifying expenditure.
Notify HMRC of intention to claim
One of the most significant changes is the requirement to notify HMRC of the intention to make an R&D claim. This must be done within six months of the end of the period, unless a claim for the company has been made within the last three years. If a company misses the six-month window, no claim can be made. HMRC have confirmed that they will not penalise companies who notify them of their intention to claim but subsequently don’t claim the relief.
Data and cloud computing
There has been recognition that datasets and cloud computing are important R&D inputs. Therefore, new categories of R&D expenditure have been brought into scope, along with some restrictions:
- Licence payments for datasets – provided the data cannot be resold or has lasting value beyond the duration of the project
- Cloud computing costs – these can be included as long as they are associated with computation, data processing, analytics, and software. Overheads relating to cloud server rental costs or data storage remain out of scope.
Staff costs for collecting, cleansing, and analysing data (provided they are incurred for a qualifying R&D project) remain eligible.
A UK focus
Currently, companies can claim relief on subcontracted R&D activity that is conducted overseas. This will change from April 2023. The government has signalled its intent to disqualify expenditure where R&D activity is subcontracted to an overseas third party.
However, HMRC have stated that R&D tax reliefs may still be claimed for the cost of software, data, cloud, and consumables sourced from overseas.
- All claims to the R&D reliefs will, from April 2023, have to be made digitally (companies exempt from online tax returns will not have to do this)
- All claims will need to be endorsed by a senior officer in the company, usually a director.
- Digital claims will require more detail than was previously required. For example, HMRC will now require what expenditure the claim covers, nature of technological advancement sought, uncertainties overcome etc.
- Claims will also need to include the details of R&D agents who have advised the company.
The government plans to include the reforms in Finance Bill 2022-23 which will take effect from April 2023.
These changes show that it is more important than ever to identify R&D work early and get in touch with us to ensure that opportunities aren’t missed.