Research and Development Tax Relief reform April 2023

New R&D legislation was published on 20 July 2022.

Changes being introduced from 1 April 2023 will affect:

• companies claiming Research and Development Expenditure Credit (RDEC).
• small or medium enterprises (SME) R&D relief.
• companies that have made a Patent Box election.

Whilst there are currently no major structural changes, the following are now confirmed:

1. the extension of qualifying expenditure

• qualifying expenditure will now include costs related to hosting, data sets and cloud computing.
• in addition, the government will make changes to the definition of R&D, to remove the exclusion of pure mathematics.

2. refocus of reliefs towards innovation in the UK

• Relief for subcontracted work and the cost of externally provided workers will be limited to focus R&D on UK activity.
• There will be some exemptions where factors/conditions that are not present in the UK are required for the relevant research (cost and workforce availability are explicitly excluded).

3. Target of abuse and improving compliance

• all claims to R&D reliefs must be made digitally (except where the company is exempt from the requirement to deliver a Company Tax Return online).
• claims must break the costs down across qualifying categories.
• claims must provide a brief description of the R&D.
• each claim to be endorsed by a named senior officer of the company.
• each claim must include the details of any agent advising on the compilation of the claim.
• companies will need to inform HMRC, in advance, that they plan to make a claim. They will need to do this, using a digital service, within 6 months of the end of the period to which the claim relates. However, companies that have claimed in one of the preceding three periods will not need to pre-notify.

Previously announced and further consequential measures

• several changes will be made to correct anomalies and ensure the reliefs operate as intended, for example the requirement that in order to qualify for R&D relief, expenditure must be paid within two years of the end of the accounting period.
• legislation will also be amended so that the Health and Social Care Levy will be claimable in the same way that employers’ NIC is an eligible cost.
• sections of the Patent Box rules require consequential amendment to include data and cloud computing costs.

Points to takeaway

• potential new claimants and their advisors will have a very short timeframe to make pre-claim notifications. Last minute claims will not be possible.
• companies operating internationally should review their arrangements and how the changes will affect them.
• companies making patent box elections should also review the effect of the changes.
• companies using R&D boutiques or preparing their own claims with limited technical or financial advice may need to reconsider their approach.

The full policy proposal can be found on the HMRC website here.

For guidance and support in submitting an R&D claim please contact Katherine Van Eyken on 01932 830664 or email katherine.vaneyken@wardwilliams.co.uk.