You are hopefully aware of the imminent changes to the R&D tax scheme coming into effect in April 2023. That might sound like a long way off but it is not. If this affects your business, you can help influence the changes, so act now.

Before the government publishes the draft legislation in summer 2022, it is inviting views from stakeholders on the detailed implementation of these measures. The legislation will be included in the Finance Bill 2022-23 and final legislation, taking account of any comments received, will come into effect in April 2023.

Let us have your feedback by 31 January 2022. We will collate all comments, along with our own, and send the compiled document to HMRC. Above all, we are concerned about companies being unfairly penalised on legitimate claims.

Recap of the proposed changes and areas for consultation

HMRC’s R&D Tax Reliefs Report proposes changes to expenditure on third-party workers, qualifying expenditure on cloud computing and datasets, and some administrative and technical amendments.

1.   Restriction on claiming for overseas R&D activities

• Claims for subcontractors or externally provided workers undertaking qualifying R&D abroad will not be possible, refocusing the reliefs towards UK skills and employment.
• The overseas R&D activities themselves will not count towards the UK’s ambitious target of R&D making up 2.4% of GDP.

HMRC wants to understand where the proposed changes would unfairly stop businesses claiming for R&D that can only be undertaken overseas. A recent example is developing the AstraZeneca vaccine, where some clinical trials needed to be done in Brazil.

2.   Preventing abuse of the R&D scheme

• All claims will be made digitally through HMRC’s COTAX portal.
• Each claim will be endorsed by a senior person at the company.
• Details of the agent involved will be required.
• Companies will have to notify HMRC in advance that they wish to make a claim.

3.   Cloud computing and data costs to qualify for relief for both SME and RDEC schemes

• Licence payments for datasets and cloud computing costs that can be attributed to computation, data processing and software will be eligible for tax relief.
• Attributing datasets solely to R&D will be complex.
• Changes will be made “in the spirit of the existing legislation”, where relief is not available for general overheads associated with cloud.

HMRC wants to understand how this distinction could operate in practice, such as costs that should be excluded.

4.   Addressing unforeseen anomalies in the schemes

• HMRC will allow for companies to make an RDEC claim, where an enquiry reveals that legitimate R&D expenditure was mistakenly claimed under the SME scheme.
• All companies in a group will enjoy a “period of grace” when they become a “large company” for R&D purposes.
• A company that is not a “going concern” will be able to make a claim.
• Expenditure within two years of the end of the accounting period will qualify.

Next steps

To ensure your views are included in our collated response to the government, we need your observations by 31 January 2022.

Contact R&D Director Thomas Hayden on thayden@mks.co.uk by 31 January 2022.

For more information about the changes, click here.