R&D tax relief review and new requirements

Last month, HMRC published a draft guidance on the changes in the R&D legislation that is effective for accounting periods beginning on or after 1 April 2023.

Some parts of this guidance are still subject to consultation such as a potential simplified R&D tax scheme to replace the existing SME and RDEC schemes (taking place from the 13th of January to the 13th of March). However, it also covered many upcoming changes with few elements going into more detail than initially expected. The final legislation will be included in the Finance Bill in 2023.

This article will summarize the key upcoming changes that will affect your R&D claim and founders must be aware of.

Additional information required

For accounting periods starting on or after 1 April 2023, a company must submit an Additional Information form. This form will be live in April 2023.

The form should be submitted before, or at the same time as, the claim.

Information required

The following information must be provided:

• the Unique Tax Reference (UTR) number of the company;
• employer PAYE Reference number;
• VAT Number;
• contact details of main internal R&D contact at the company;
• the main type of business carried out (SIC code);
• if completed by an agent, the agent reference number;
• contact details of any agent working on the claim;
• accounting period start and end dates;
• qualifying expenditure under the following categories:
  • employee costs
  • externally provided workers
  • contracted out R&D
  • software
  • consumable Items
  • payments to participants of a clinical trial
  • data licence (for accounting periods starting on or after 1 April 2023)
  • cloud computing services (for accounting periods starting on or after 1 April 2023)
  • contributions to independent R&D costs (RDEC only)

• amount of the above that is qualifying indirect activities (QIAs);
• number of projects claimed for;
• descriptions of the projects under 5 headings:
  • What is the main field of science or technology?
  • What was the baseline level of science or technology that you planned to advance?
  • What advance in that scientific or technical knowledge did you aim to achieve?
  • What scientific or technological uncertainties did you face?
  • How did your project seek to overcome these uncertainties?

• for 1 to 3 projects the company will need to describe all projects, covering 100% of the qualifying expenditure;
• for 4 to 10 projects it will need to describe projects that account for 50% of the total expenditure, with a minimum of 3 projects described;
• for 10 to 100 plus projects, it will need to describe projects that account for 50% of the total expenditure, with a minimum of 3 projects described – however, if the qualifying expenditure is split across multiple smaller projects, describe the 10 largest;
• number of EPWs who worked on the projects;
• PAYE scheme reference for those EPWs;

Large Business customers with a Customer Compliance Manager (CCM) should contact the CRM to agree with the level of information required before submitting the Additional Information form.

Subcontractors working on R&D

To be qualifying expenditure, expenditure on payments to subcontractors is required to be UK expenditure, or to be qualifying overseas.

UK expenditure

UK expenditure is that which is attributable to relevant R&D undertaken in the UK.
This will involve the activities which the subcontractor is undertaking and which are part of the R&D project actually taking place in the UK.

Qualifying Overseas Expenses

Qualifying overseas expenditure is the amount of R&D undertaken outside the UK, where particular 3 factors apply. They must all apply for the expenditure to qualify. Those factors are:

• the first factor is that conditions necessary for the R&D are not present in the UK;
• the second is that the conditions are present in the location where the R&D is undertaken;
• the third factor is that it would be wholly unreasonable to replicate the conditions in the UK.

Example

If the R&D involved project is placing sensors on active volcanoes, this requires a condition (the presence of a volcano) that is not present in the UK and one which it would be wholly unreasonable to replicate. And it is a condition that exists in places outside the UK. So this activity would be QOE if undertaken in a location where the necessary conditions arise.

Wholly unreasonable

Whether it is wholly unreasonable to replicate the conditions in the UK will depend upon the R&D, the circumstances of the company and the reason for undertaking the work abroad.

Example

The company wishes to carry on destructive testing of its product, using a commercial testing lab (to which the work would be subcontracted). If such facilities exist both, in the UK and abroad, the activity would not qualify if undertaken outside the UK. If they do not exist in the UK, the question is whether the company (not somebody else) can reasonably replicate them.

If the company’s focus is R&D, design and production, it might not have the expertise to do this, or it may not be capable of effectively owning and running a facility that might see little use. It would be wholly unreasonable for the company to do this. If, on the other hand, the company or a third party already operates similar facilities in the UK which could be easily adapted, it would be reasonable to expect it to do so, and the condition would not apply.

It may be that there is time pressure, requiring the use of a facility abroad which could be replicated in the UK but would take too long, or that UK facilities are available, but are fully booked on the required timescale.

New qualifying expenses

For accounting periods starting on or after 1 April 2023, data licence and cloud computing services costs can be qualifying expenditures when employed in activities which directly contribute to the resolution of scientific or technological uncertainty.

Where data or cloud services are used for multiple purposes within the business, HMRC will accept a reasonable apportionment between different functions. An example of reasonable apportionment would be one that was based on e.g., staff hours used, number of licences used, a ratio of R&D data storage to non-R&D data storage. It is important to keep evidence to support any apportionments. 

Prior to 1 April 2023, there was a limitation potentially preventing claims for advances in mathematics itself. This meant that it was unclear whether activities relating to pure mathematics met the definition and whether tax relief was unavailable.

From 1 April 2023, the BEIS guidelines have been updated to make clear that activities relating to pure mathematics will now meet the definition and are eligible for R&D tax reliefs.

Claim Notification

For accounting periods starting on or after 1 April 2023, some companies will need to submit a Claim Notification form for their R&D claim to be valid.

Customers who need to supply a Claim Notification are:

• first time R&D claimants
• R&D claimants who have not made an R&D claim in any of the previous 3 calendar years

The Claim Notification is made for a period of account and will cover any accounting periods that fall within that period of account. This means that if a company’s accounting period changes or they decide not to claim until a later account period, they may need to submit a new Claim Notification form.

The earliest date that a Claim Notification form can be submitted is on the first day of the accounting period to which the claim relates. The latest date for submitting the Claim Notification form is 6 months after the end of the period of account that includes the relevant accounting period.

What’s next

Finerva will be responding to the consultation on the draft guidance. However, many businesses will have to improve their record-keeping for R&D projects that will support their future claims. 

We have extensive experience in supporting our clients in setting up relevant procedures, so please get in touch with our advisors regarding your future R&D claims – we’ll be delighted to support your business.