Treasury sets out overhaul of R&D relief
Following a consultation on research and development (R&D) reliefs, the government has set out plans to go ahead with a number of changes to criteria and the introduction of tough new anti-abuse measures
A review focused on the two R&D tax relief schemes – the Research and Development Expenditure Credit (RDEC) and the small and medium enterprises (SME) R&D relief, was open for comment after the spring Budget.
At the autumn Budget 2021, the government announced the reforms to R&D tax reliefs would come into effect from April 2023, to support modern research methods by expanding qualifying expenditure to include data and cloud costs, refocus support towards innovation in the UK and a raft of measures to target abuse and improve compliance.
UK companies claimed tax relief on £47.5bn of R&D expenditure in 2019, but the ONS estimates that businesses only carried out £25.9bn of privately financed R&D in the UK, with nearly half of the activity offshored.
In the latest Treasury documents, the government confirmed that expenditure via licence payments on purchasing datasets which are used directly for R&D in a qualifying R&D project will qualify for relief.
Companies will not be able to claim relief for the cost of datasets that can be resold or have a lasting value to the business beyond the duration of the project. They will be able to claim relief on costs for staff-related expenditure for the purpose of collecting, cleansing and analysing data, provided these costs are incurred for a qualifying R&D project.
Businesses will also be able to claim relief for the cost of cloud computing services used directly for R&D. For example, costs which can be attributed to computation, data processing, analytics and software. However, they will not be able to claim relief on the costs of data storage or server capacity. The government is asking for feedback on how this could work in practice, especially on splitting costs and defining billing arrangements.
On offshored activity, the government will stop claims for any non-UK based R&D. The Treasury document states that ‘where companies subcontract R&D activity to a third party, they will in future only be able to claim relief for that expenditure where that third party performs the work within the UK’. The relief will only be available to staff paid through the UK payroll.
If a company subcontracts work for R&D overseas, it would not be able to claim R&D tax reliefs on that expenditure, but it would still be able to deduct those costs from taxable profits in the normal way.
Companies will still be able to claim R&D tax reliefs on the costs of software and consumables sourced overseas, as well as payments for clinical trial volunteers overseas and payments for data and cloud computing services sourced overseas, as these are considered inputs to activity in the UK.
While the government is keen to remove any reliefs from offshored R&D, it does leave the window open for some scope for exemptions. The Treasury states that ‘it is interested in views from stakeholders on whether there is a case for any narrow exceptions to allow claims on some overseas activity. However, these would not include allowing claims for overseas activity on the basis that it is less expensive than in the UK’.
The government will publish draft legislation in the summer of 2022 and at that time will ask for views from stakeholders on the detailed implementation of these measures. The measures will be introduced in Finance Bill 2022-23.
Abuse and non-compliance
HMRC estimates that error and fraud across both schemes amounts to 3.6% of total relief cost, or £311m.
There is concern that the growth in the number of so-called R&D advisers is creating more spurious claims.
The Treasury said: ‘We have seen a recent emergence of R&D advisers, who are typically not members of professional bodies, cold-calling small & medium enterprises (SMEs), suggesting they could make an R&D claim.
‘These advisers, many with no background in tax, take advantage of customers who are unfamiliar with claiming for R&D, often charging on a commission basis, and submit numerous dubious claims.
‘The commission basis can lead companies to view a claim as cost-free and some are willing to accept questionable claims.’
HMRC is already working on identifying potential fraudulent claims and will ramp up activity in this area. As part of the next stage of this strategy, HMRC will further increase the resource for R&D tax credit compliance, with the creation of a new cross-cutting team focused on abuse.
The claims process will also be changed in a bid to curb abuse.
The following measures will be introduced from April 2023:
- all claims to the R&D reliefs – either for a deduction or a tax credit – will in future have to be made digitally (except from those companies exempt from the requirement to deliver a company tax return online);
- these digital claims will in future require more detail – for example, on what expenditure the claim covers, the nature of the advance sought, the field of science or technology, the uncertainties overcome;
- each claim will need to be endorsed by a named senior officer of the company;
- companies will need to inform HMRC, in advance, that they plan to make a claim; and
- claims will need to include details of any agent who has advised the company on compiling the claim.
Treasury R&D Tax Reliefs Report, issued 30 Nov 2021