R&D tax relief schemes – key changes

At the 2021 Spring Budget, the government launched a consultation of the two R&D tax relief schemes to understand the nature of private-sector investment in R&D and ensure the UK remains a competitive location for cutting edge research (see our previous blog).

The results of this consultation have now been published and provide more detail on changes announced at the 2021 Autumn Budget and likely to come in the future.

We have summarised the key changes below:

Data and cloud computing costs (announced at 2021 Autumn Budget)

Qualifying expenditure categories will be broadened to include the following:

  • License payments for purchasing datasets used directly in qualifying projects.
    • This will exclude datasets that can be resold or have lasting value beyond the duration of the R&D project.
    • Costs must be apportioned where multiple datasets are not all used in a qualifying project.
  • Cloud computing costs that can be attributed to computation, data processing, analytics and software used directly for R&D.

This will be welcome news for businesses using datasets to carry out their research and development.

Refocusing on innovation in the UK (announced at 2021 Autumn Budget)

Qualifying expenditure on R&D activity conducted overseas will be restricted under the following rules:

  • Subcontracted costs will only be eligible where third party work is carried out in the UK.
  • Only externally provided workers payments via a UK payroll will qualify for relief.

This is potentially quite a substantial change for some claimants, but may push businesses to look for UK suppliers. Whether this is commercially feasible is another question entirely.

Abuse and compliance

R&D reliefs present specific risks of error and fraud which will be addressed with the following measures:

  • HMRC will increase resource for R&D credit compliance with a team focused on tackling abuse of the regime.

This is something HMRC have already been trying to do, recruiting 100 more R&D staff (allegedly) – and it corresponds in an apparent increase in enquiries and R&D tax cases in the tribunal system.

  • Future claims will require the following:
    • To be submitted digitally.
    • More detail on expenditure, the scientific or technological advance/uncertainty and the field of science or technology.
    • To be endorsed by a named senior officer of the company.
    • An advance notice to HMRC that a claim is to be made.
    • Details of any agent that has advised on the claim.

This is potentially the most significant change and it will be interesting to see how HMRC tackle this. It does however align policy with what we and other reputable advisors have always said – support your claim with a comprehensive report, ensure the competent professionals at the business can stand behind the claim, and use a reputable advisor.

This also aligns somewhat with the approach seen in recent tribunal cases testing R&D claims.

Overall it is a welcome change although it will increase the administrative burden in some cases.

Anomalies and unforeseen consequences

Legislation will be amended to address unfairness and anomalies. Changes to legislation will cover the following:

  • Allowing companies to make an RDEC claim following certain types of assessment by HMRC.
  • Allowing companies to make an RDEC claim where they had made an incorrect SME claim on the expenditure.
  • Allowing companies that become large to retain SME status for one year.
  • Amending “going concern” rule to focus on unviable companies.

These are generally irrelevant to most clients, but the retention of SME status for one year could be very valuable in some corporate transactions – it will be interesting to see the detail on these changes for the isolated incidents they apply to.

The government welcomes your views which will be considered in the next review phase. To contribute your views, please send written submissions to RDTaxReliefs@hmtreasury.gov.uk. The deadline for contributions is 8 February 2022. Draft legislation is due to be published in summer 2022.

Full outcomes of the consultation can be found here.

Contact us

If you have any queries or would like assistance in relation to a claim, please contact us at advice@taitwalker.co.uk.