R&D Tax Relief Reform
If you thought Christmas Day was the most exciting day this time of year, well you are probably still right…! But in the world of the tax, 30th November saw “Tax Administration and Maintenance Day” in which the government published a number of new consultations along with updates on existing consultations.
On the agenda was R&D Tax relief following on from the announcement in the Autumn Statement that there were various plans to reform the R&D regime from 1 April 2023 including:
- Expanding qualifying expenditure to include Data and Cloud costs
- Focusing on innovation in the UK
- Administration requirements which target improvements in compliance
The three areas came as little surprise given HMRC’s views in their latest consultations. We have representatives here at BHP who consult with HMRC via the Research & Development Consultative Committee to discuss possible improvements to the reliefs, and these reforms have been on the agenda for a while, especially Data and Cloud costs given the modern world that we live in.
HMRC have openly commented in the past that the scheme was never intended to cover ALL R&D costs incurred but give relief for targeted expenditure. Data and Cloud costs have become a feature of certain developments in recent years, and it makes total sense for them to be included.
With regards to administration, BHP has prided itself for years in giving as much detail to HMRC as possible when we are making R&D claims. We’ve always had the motto of “Answer any questions HMRC might have before they arise”. It just makes sense to us and means we are always comfortable with what we submit to HMRC.
However, over the years we have seen such a wide variety in the level (and quality) of information which has previously been supplied to HMRC by new clients to us, or in some instances information that is delivered by third parties offering their R&D services. I, therefore, have absolutely no problem in HMRC tightening up R&D compliance.
The proposals are outlined in detail and are subject to the consultation so may ultimately change in the final legislation however the current proposals give a good indication of what is likely to come in via Finance Bill 2023 and take effect from April 2023.
So, what is proposed?
Data & Cloud Costs
HMRC are planning on introducing relief for:
- License payments for datasets
- Staffing costs for creation of datasets
- Cloud computing and software
Within HMRC’s response, they comment that “this modernisation will ensure the reliefs better incentivise cutting edge R&D methods which rely on vast quantities of data that are analysed and processed via the cloud”.
One of the key points is that there will be no claims available where the datasets can be resold or have a lasting value to the business beyond the duration of the project.
With regards to the staffing costs, this is more of an administration update as staff costs relating to collecting, cleansing and analysing data can already be claimed on, so this is HMRC making that position clearer in their guidance.
And finally, HMRC now agree that relief should be available for cloud computing services used directly for R&D with examples given being those attributed to computation, data processing, analytics and software.
The focus here is quite clear in that the government are targeting costs relating to overseas subcontractors and externally provided workers. So, from April 2023, HMRC plan to curtail R&D tax relief for both subcontractors where the work is not undertaken in the UK, and for externally provided workers where they are not paid through the UK payroll.
These rules are being changed for both the SME and RDEC schemes, so it will affect claims made by both small & medium entities and large companies.
From a personal point of view, this seems slightly harsh and on the face of it, mistargeted. I have many claims where companies sub-contract in work from overseas or make use of externally provided workers from overseas, especially in group company scenarios. To me, as long as the technology being developed is ultimately going to be utilised in the UK to help a company flourish, this seems a slightly backwards step in attracting input from the best talent from around the world.
I dare say it also seems slightly harsh since Covid and the adoption of “work from anywhere” technology and cultures as many workers have moved back to their native countries but still undertake work for their UK company.
It will be interesting to see how HMRC’s view on this may change over the coming months once replies to this release are given and if the scope for relief is ultimately only narrowed rather than shut off altogether.
The National Audit Office estimate that fraud through R&D claims costs HMRC around £311 million per year so it is no surprise that they are looking closely at the administration of the relief. We are aware that HMRC has in the recent past taken on around 100 new R&D officers to tackle fraud associated with the relief, so this seems to be their next step in the battle.
As I noted above, we at BHP have always been confident in what we submit to HMRC and, so we welcome HMRC’s stance in this area to remove fraudulent and spurious claims.
HMRC have therefore announced, that again from 1 April 2023 that:
- R&D claims will now have to be made digitally.
- Claims should include more detail (e.g. what the expenditure relates to, the nature of the advance sought, the field of science of technology and 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.
- Claims will need to include details of the agent advising the company
At BHP, we are already doing most of the above so do not foresee any major issues with these proposals although it is unclear as to how the fourth suggestion will be implemented and what this may mean in practical terms.
The government are allowing views to be submitted by 8th February 2022 to the proposed changes. As a firm, we will be formulating a plan to contribute to these responses and would of course be happy to incorporate any comments or suggestions that you have.
If you have any questions in the meantime, please do let me or your normal BHP contact know.