Research and development (R&D) tax relief has been under much scrutiny over the last few years. Some changes are now in place to prevent abuse of the R&D system, while others aim to develop skills and innovation within the UK.
As a business applying for R&D tax credits, you need to know how these changes may affect you.
Focusing on UK operations
In March’s Spring Statement, Chancellor Rishi Sunak announced that from 1 April 2023, the Government would be more committed to providing R&D relief to companies working in the UK.
If a company subcontracts R&D to a third party, it can only claim R&D relief if the work is carried out in the UK.
Similarly, where external workers are hired, the relief will only be available for workers paid through a UK payroll.
Any companies with subsidiaries based overseas will have their R&D claims reduced.
The Chancellor also announced that Government spending on R&D will increase by 2024 to £20 billion a year, representing an increase of £5bn.
Data and cloud computing
In the statement, the Chancellor emphasised the importance of R&D for companies using datasets and cloud computing. From next year, R&D tax credits will be available for:
- Dataset licence payments used for R&D
- Cloud computing costs used for software and data processing
The Government also confirmed that pure mathematics work can be claimed as a qualifying cost for R&D.
Tackling system abuse
Reports suggest several companies have abused the R&D relief system, receiving money when they weren’t eligible.
The estimated amount of R&D tax relief claimed for the year ending March 2020 was £7.4bn, nearly 20% higher than the year before. This corresponds to £47.5bn of R&D expenditure, 15% higher than the year before.
In a report from the National Audit Office (NAO), there were estimated errors in both the small and medium enterprises (SMEs) and research and development expenditure credit (RDEC) schemes, totalling £311 million.
This has led to the Government setting out further compliance criteria for HMRC to use when processing claims.
These steps include:
- creating a new team to focus on R&D tax credit abuse and compliance
- all claims of R&D tax relief will be made digitally unless the applicant is exempt
- digital claims will require more detail on how the money will be spent
- each claim will need to be signed off by a senior officer for the company
- companies wishing to apply will have to inform HMRC in advance of the application.
The majority of claims will be paid out by HMRC in 40 days, 12 days longer than the standard processing timeframe.
Future changes to R&D
The Chancellor is expected to announce further reforms to the R&D tax credit system in the Autumn Budget later this year.
Since the 2021 Autumn Budget, the Government has conducted consultations on the proposed changes to the system and will use those findings to shape any further reforms.
If you want to know more about how the changes to R&D tax credits will affect your business, get in touch with our R&D tax experts or telephone us on 020 7330 0000.