Research and Development tax credit changes
Research and Development (R&D) tax credits are intended to support companies who invest in science and technology projects.
To qualify for R&D tax credits companies must be developing or enhancing new or existing products, services or processes. Staff costs, software and research contributions all qualify under R&D.
However, during the Autumn Budget the Chancellor announced some significant changes to the R&D tax credits scheme in order to support modern research methods. The changes are due to take effect from April 2023.
It was confirmed in recent Treasury documents that expenditure via licence payments on purchasing datasets, which are used for research and development, will qualify for relief.
Relief will also be available on the cost of cloud computing services which are used directly for R&D. However, businesses will not be able to claim relief on costs of the server capacity or data storage.
As part of the R&D reform, the government will also stop claims for any non-UK based research and development.
The Treasury stated ‘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 Treasury further stated that relief will only be available to those staff who are paid through UK payroll.
The cost of software and consumables sourced overseas will still be eligible for R&D relief as well as payments for overseas clinical trial volunteers.
In 2019, UK companies claimed tax relief on over £47bn in R&D expenditure. However, the Office of National Statistics estimates that only £26bn of that was carried out in the UK, with the rest being carried out offshore.
Draft legislation will be published in summer 2022 and the measures will be introduced in Finance Bill 2022/23.
Tax Fraud
HMRC has estimated that fraud across both R&D schemes amounts to a total of 3.6% or £311m.
It is believed that HMRC are already working to identify any potential fraudulent claims and will increase resources for R&D tax credit compliance with a new team.
To stop abuse of the R&D schemes, the claims process will also change from April 2023 with new measures including:
- All claims, either for a tax credit or deduction, will need to be made digitally (this will not apply to those who are exempt from delivering a company tax return online)
- Digital claims will require more details, for example the uncertainties overcome, whether the field was science or technology, what the expenditure claim covers and the nature of the advancement
- A senior member of the company will need to approve each individual claim
- Companies will need to let HMRC know they are planning to make a claim in advance
- Where an agent has helped compile a claim, their details must be included
For more information on Research and Development tax credits or to check if your company is eligible to make a claim, get in touch with us.
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