New reforms will affect companies claiming tax relief or credits on research and development (R&D) expenditure for accounting periods beginning on or after 1 April 2023.
Currently, R&D tax relief for small or medium-sized enterprises provides an extra 130% deduction on qualifying R&D expenditure. Large companies can claim a 13% R&D expenditure credit.
R&D expenditure
The new reforms will mean that expenditure on data licenses and cloud computing will now qualify for relief, and the definition of R&D is amended to remove the exclusion of pure mathematics.
However, relief will be focused on UK activity. This means expenditure on external workers will generally only qualify to the extent that those workers’ earnings are taxed through PAYE. The intention is to have employee skills and industrial know-how arising in and benefiting the UK, but it will make it more difficult for companies facing global competition for specialist talent.
Exceptions will apply where the activity cannot reasonably be undertaken in the UK, however cost and workforce availability are not reasons for an exception.
Abuse and compliance
All claims will in future have to be made digitally.
Claims will have to break costs down across qualifying categories and provide a brief description of the R&D. Details of any agent who has advised the company on compiling the claim will also have to be provided.
HMRC must be pre-notified of claims using a digital service within six months of the period to which the claim relates. There will be an exception if a company has already made a claim in one of the preceding three periods. There is a risk here that lack of awareness of the pre-notification requirement will mean an otherwise legitimate claim being denied.
The time limit for making a claim will be extended to two years from the end of the period of account to which the claim relates.
The government’s policy paper explaining the changes can be found here.
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