R&D tax relief – a changing landscape

2023 will see some of the most wide-ranging changes to R&D tax relief since its inception in 2002. We have covered the changes to the rates and benefits from R&D relief in a separate blog LINK, so here we outline the wider changes to the legislation that impact on the scope of R&D, the location of resources and the extent of information required to support a claim. Draft legislation and guidance covering these changes has already been been published, with the amendments set to come into force for accounting periods beginning on or after 1 April 2023.

Refocusing the reliefs towards innovation in the UK
To ensure the maximum benefit to the UK, relief for subcontracted work and the cost of externally provided workers will change to be limited to focus solely on UK activity. There will be some very narrow exemptions where factors such as geography, environment, population or other conditions that are not present in the UK are required for research (for example, deep ocean research) and where there are regulatory or other legal requirements for certain activities to take place in specific territories (for example, clinical trials). The exemptions will not include cost or workforce availability.

In essence, this means that R&D claims will exclude all overseas subcontract and EPW resources except in some very unusual situations. This will present challenges for any organisation using offshore resources of any kind and the cliff-edge nature of the changes offers limited opportunity to move towards different approaches in the short term.

Extending qualifying expenditure
To incentivise R&D using modern computational approaches, the government is extending the scope of qualifying expenditures to include the costs of data licence and cloud computing services costs. To further support cutting edge R&D, they will also make changes to the definition of R&D for the tax reliefs, to bring pure mathematics within scope. This area of change represents sensible steps to modernise the legislation for current technology trends and will be good news for any company utilising cloud computing in their R&D efforts.

Tackling abuse and improving compliance
To tackle abuse of the reliefs, all claims to the R&D reliefs will in future have to be made digitally. These digital claims will have to break the costs down across qualifying categories and provide a description of the R&D. Each claim will need to be endorsed by a named senior officer of the company. In many respects this is merely the enforcement of what has long been regarded as best practice within the industry and such steps will serve to frustrate less scrupulous providers.

Companies will also need to inform HMRC, in advance, that they plan to make a claim using a digital service, within 6 months of the end of the period to which the claim relates. Companies that have claimed in one of the preceding three periods will not need to pre-notify. Claims will also need to include details of any agent who has advised the company on compiling the claim. There has been a significant amount of commentary on this change as it

These changes are seeking to make fraudulent claims easier to identify and prevent, as well as allow HMRC sufficient information to objectively assess all claims. Whilst most of the requirements are straightforward we expect this to result in an increase in the effort required to adequately prepare in R&D claim and claimants should be aware of this for relevant periods.