Changes to R&D Tax Relief – UK First

R&D tax relief reforms will allow deductions for datasets and cloud computing, focus the relief on the UK, and change the claims process to limit the likelihood of abuse.

On 30 November 2021 HMRC released the policy paper R&D Tax Reliefs Report. The proposals in the report follow announcements in the Budget to:

• extend qualifying expenditure to include data and cloud costs.
• direct support towards innovation undertaken in the UK; and
• target abuse and improve compliance

Datasets

The cost of licencing datasets for direct use in a qualifying R&D activity will be an acceptable expenditure. These datasets must not be resaleable by the corporation, nor should they have any permanent value or usage outside of R&D. Essentially, the dataset must function as a consumable object in the R&D process.

There will also be limitations on the pricing of datasets qualifying where there is a right to sell or distribute the dataset.

Cloud computing and software

The costs of cloud computing services that are directly used for R&D activities will become an eligible cost. This is expected to encompass costs that can be attributed to computation, data processing and software in respect of R&D activities.

It is intended that the rules will exclude costs in this category to the extent that they are attributable to overheads relating to servers and data storage.

Excluding non-UK R&D activities

There is some fear that too much of the economic gain from the UK’s R&D tax credits is being sent overseas. To fix this, the government proposes limiting relief for payments to subcontractors where the contracted operations take place in the United Kingdom. Similarly, where corporations claim expenditure on externally provided employees (EPWs), these will be limited in the future to EPWs subject to UK PAYE/NIC.

When R&D tax relief was introduced for SMEs, there was a need to ensure it didn’t breach the EU non-discrimination provisions. The easiest way to ensure this was not to have any territoriality restriction at all. Now that the UK has left the EU there is no longer a need to respect that non-discrimination requirement.

Advisers must be named

Where a company has used an R&D adviser to assist in the preparation of the claim, details of that adviser will need to be provided with the claim. This should draw out those advisers who hide behind the claimant, but the key issue is what HMRC will then do with the information.

Again, this is something that we already provide to HMRC along with our contact details so that they can contact us to discuss any parts of the claim which might require additional information. Companies that use proper R&D advisers, it is safe to say that the new changes aren’t going to affect them in terms of compliance.

Targeting abuse and non-compliance

These proposals are a response to a growing concern that the R&D reliefs are being abused, whether by deliberate attempts to make false claims or through poor quality claims facilitated by poor quality advisers.

HMRC was criticised in both the department’s 2019/20 and 2020/21 accounts for not adequately controlling this risk of abuse. The government is intending to introduce a series of measures to help address these concerns.

Online only

All requests for R&D tax credits must be submitted online. These claims will also have to include a lot more detail about the expenditure, the nature of the gains sought, the specific domains of technology, and the uncertainties resolved. This is all material that a skilled adviser would include in a claim anyway, it is possible that a claim structure is proposed that has to be followed.

All claims made by TaxQube are submitted online and we go above and beyond the basic narrative to provide highly detailed narratives to HMRC. It is important to document these projects because let’s say you get investigated a few years down the line, it will become extremely difficult for companies to explain their claim if detailed R&D processes are not documented.

Directors must take responsibility

Claims will need to be endorsed by a senior officer of the company. This is reminiscent of the senior accounting officer requirements for larger companies. The government wants a senior person within the company to sign off to the effect that they are happy the claim has been properly prepared. It’s not clear yet whether there will be any form of personal liability.

Advance warning

Companies will be required to notify HMRC in advance that they will be making an R&D claim. At the recent R&D Communication Forum meeting there seemed to be confusion within HMRC as to whether ‘in advance’ meant before the start or before the end of the accounting period.