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R&D tax relief reforms in 2023

Companies that claim tax relief or tax credits
on research and development (R&D) expenditure will see some changes to the system for accounting periods starting from 1st April 2023.

Several new activities will qualify for R&D relief, but the process for making R&D relief claims will be different. Not only will the service go completely digital, alongside many other tax services, but the rules are also being adjusted to try to reduce fraudulent R&D claims.

Here’s what you should know about the R&D tax relief
changes that will come into effect next year.

Extending R&D expenditure

As an incentive for research and development to use modern digital approaches, the government is extending qualifying expenditures to include data licences and cloud computing. All cloud-related costs could now fall under the scope of qualifying expenditure for future R&D relief claims.

The government is also adding secondary legislation to amend the exclusion of pure mathematics. This means that research and development
underpinned by mathematical advances, and pure maths in particular, will now be covered under the definition of R&D for tax relief purposes.

However, in an attempt to refocus tax reliefs towards innovation within the UK, these qualifying expenditures will only apply to UK-based activity. This means that expenditure on overseas workers will only qualify to the extent of their earnings being taxed through PAYE, limiting talent searches.

Of course, there will be a few exceptions for cases when the R&D activity can’t reasonably be carried out in the UK. Workforce availability and costs limitations aren’t valid reasons, but factors such as different geography, population, and environmental conditions that aren’t present in the UK but are required for research purposes could be exempt – for example, deep ocean studies or clinical trials.

R&D fraud and compliance

Abuse of the R&D tax relief system and boundary-pushing has become a growing concern for the government over the last few years. According to HMRC’s annual accounts, the estimated level of fraud, error, and non-compliant behaviour is 4.9%
of the relief costs in 2021–2022, up from 3.6% in 2020–2021. In April 2022, HMRC identified an irregular claims pattern that spurred on the reforms.

To tackle non-compliance levels, whether due to deliberate fraud or genuine error, all R&D relief claims must be made digitally in the future. Whether it’s for a deduction or credit, all Corporation Tax returns including an R&D claim must be submitted through HMRC’s online tax returns portal.

Digital R&D claim submissions will also have to provide additional information about the R&D activities being claimed for. This includes descriptions of the research and development work, breakdowns of costs across qualifying categories, details of any advisory agents who helped to compile the R&D claim, and signed endorsement from a senior officer within the company.

HMRC will also require pre-notification of intended claims through their digital service. Companies will need to inform HMRC in advance of an upcoming claim within 6 months of the end of the period that it relates to. However, if a company has already made a claim in one of the previous three periods, they won’t be required to re-notify HMRC of their intention to file another R&D claim.

Companies will have longer to make a claim even after pre-notifying HMRC, as the time limit will be extended to 2 years from the end of the relevant accounting period rather than the current limit, which is 12 months from the statutory filing date.

How will this affect R&D tax relief claims?

The R&D relief reforms are likely to affect companies that claim tax relief for research and development activities their businesses carry out under one of two schemes – Research and Development Expenditure Credit (RDEC) or small or medium enterprises (SME) R&D relief.

The changes could also affect some companies who make a Patent Box election, as this regime uses R&D qualifying expenditure definitions as part of its calculations, requiring further amendments.

Since these reforms come into effect for accounting periods starting on or after 1st April 2023, there could be inconsistencies between businesses reporting relief claims over different time periods. For example, Business A with their year-end in December would first feel the impact from 1st January 2024, while Business B with a March year-end would immediately be affected from April 2023.

This means that Business A could claim under the old rules for up to 9 months longer than Business B, allowing them to get R&D relief for overseas expenditure that would be ineligible under the new rules. As the legislation is still in the drafting stages, the government could adjust this for fairness.

If you’d like to learn more about this topic, you can read through the government’s ‘Research and Development Tax Relief reform’ policy paper. Should you have any concerns about your company’s future R&D tax relief or tax credit
claims, why not contact GBACaccountants in Barnsley, who also cover Leeds and Sheffield, today to arrange a consultation?