Christopher Mackley, Managing Partner and Neil Brackstone, BDO Partner, look at the tax relief changes announced in 2021.
R&D support – how it will work from April 2023
On July 20, 2022, HMRC published a bill on R&D tax relief changes announced in the 2021 Autumn Budget. These changes will affect companies claiming either of the two schemes ( PME or RDEC) and will take effect for fiscal years beginning on or after April 1, 2023.
Extension of costs eligible for R&D relief
R&D expense categories will be expanded to include dataset and cloud computing costs. However, as expected, these costs cannot be included in R&D claims on an aggregate basis – for example, where these costs relate directly to R&D activities they may be included, but not where they relate to a “qualifying indirect activity” (for example when you include a small proportion of non-technical staff time attributable to qualifying R&D projects).
R&D in pure mathematics will also be granted relief and may be part of the applicant’s eligible R&D activities, although the term “pure mathematics” is not yet defined in the legislation.
Refocusing aid on UK activities
One of the most fundamental changes in the autumn 2021 budget was to refocus the R&D relief granted to activities carried out in the UK: in the future, outsourced R&D work and the cost of external workers (EPW) will be limited to work undertaken in the UK. .
As previously announced, there will be specific exemptions where work outside the UK is permitted for geographic, environmental, social or regulatory/legal requirements. The HMRC statement released with the bill gives examples such as deep sea research and clinical trials and by implication could include medical technology trials in specific patient groups, international telecommunications tests or technologies designed for extreme environments.
The new legislation clarifies that companies will not be able to claim that overseas costs fall within the exemptions where the main reason for the work being carried out overseas is due to cost constraints (i.e. lower overseas staff costs) or that the company does not have suitable workers in the UK.
New administrative requirements to help “fight against abuse”
To support HMRC’s fight against abuse of R&D schemes, new due diligence and filing processes will be needed through a digital system. Although regulations for these have yet to be published, HMRC have announced that all applications will have to be made digitally (with the exception of companies exempt from the requirement to provide a company tax return on line). These claims will require a breakdown of costs by category and by individual eligible projects, as well as the inclusion of a summary of the R&D activities carried out.
In addition, claims will require the approval of a named senior company official and will also need to include details of any advising agent used in connection with the submission.
Finally, the bill already includes an obligation for businesses to notify HMRC of their intention to lodge a complaint within six months of the end of the period to which the complaint relates. Such notification will not be required when a company has claimed in one of the three preceding periods.
Help for your future R&D claims
Going forward, companies that outsource their R&D project work overseas will need to review their arrangements for the coming years and should also, at the same time, consider their group intellectual property tax strategy holistically.
The BDO Thames Valley Innovation Tax team has the expertise to help you consider both your strategic and practical approach to claiming R&D relief and your group IP tax strategy, and offer high-quality support to provide certainty for your future applications and funding.
You can find more content on R&D and other key topics impacting business on our BDO regional hub.