Research and Development tax relief – April 2023 changes

The government conducted a review of (SME) R&D and RDEC relief following the 2021 Spring budget.

The consultation explored the nature of private-sector R&D investment in the UK, how that is supported or otherwise impacted by the R&D relief schemes, how well they operated and how the targeting of reliefs worked to be most beneficial for the UK economy.

At the 2021 Autumn budget, reforms were announced to:

1. expand qualifying expenditure to include data and cloud costs
2. refocus support towards innovation in the UK
3. target abuse and improve compliance

Under current guidance, companies are permitted to claim relief on subcontracted R&D activity that is conducted overseas.   

The proposed reforms seek to refocus reliefs towards innovation performed within the UK’s borders, ie:

• disqualify expenditure where R&D activity is subcontracted to an overseas third party.
• where companies incur expenditure on payments for externally provided workers (EPWs), they will only be able to claim relief on such expenditure where those workers are paid through a UK payroll
• companies can continue to claim for subcontracted R&D costs only so long as the activity is performed in the UK.

R&D tax reliefs may still be claimed for the cost of software, data, cloud, and consumables sourced from overseas.

Draft legislation for the changes above will be published in Summer 2022 and may alter following consultation; legislation will not change until the Finance Bill 2022-23 is issued. 

Changes will take effect from April 2023.

HMRC has already allocated additional resources to R&D tax relief compliance so there is a clear move towards tightening checks and preventing areas of abuse of the R&D tax relief system.

There are other proposed reforms too, for example claims will in future require more detail, such as details on what expenditure the claim covers, the nature of the advance sought, the field of science or technology and the uncertainties overcome. 

If you would like to discuss any of the above or explore possible R&D reliefs available, please contact katherine.vaneyken@wardwilliams.co.uk