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Research & Development – Times are changing

What changes are coming?

2 Nov 2022

Tax is like technology; a forever changing landscape and something we all need to stay on top of – this includes companies who qualify for research and development tax credits, as things are changing here too!

What changes are coming?

The government is tightening up the way research and development claims are completed, tackling fraudulent and over inflated claims and the dodgy providers making ineligible claims with a new suite of changes applying to accounting periods starting on or after 1 April 2023.

Over the years there have been a number of key changes, including the Research and Development Expenditure Credit designed to encourage large companies to invest in R&D and also the cash credit claimable. Almost every year there are changes in an attempt to make the relief more attractive and to upskill the economy.

Cracking down on abuse

The first change is aimed at tackling abuse, including the requirement to state any agent’s details who have advised on constructing the claim. This could be tax advisors, accountants, or specialist R&D consultancy firms. A senior officer from the company will also need to sign off on the claim.

All claims will have to be made in digital format, rather than the current form being a report with financials stated within the report and attached to the tax return on submission.

The digital form will need to include a breakdown of costs and a description of the research and development work undertaken, and HMRC will expect submissions to be sent through their tax return portal. The claims will also have to be notified to HMRC 6 months in advance of making the claim.

Expansion of ‘eligible qualifying expenditure’ 

In addition, HMRC are introducing an expansion on qualifying expenditure on ‘software and consumables’, which includes the introduction of data licences and cloud services, and R&D relief to include any mathematical advances.

It remains to be seen how this will work in practice. The government’s idea is to support ‘tech heavy’ firms and to reduce the ambiguity about what can be included in R&D tax relief claims.

Firms with cloud computing and pure mathematics can apply with confidence for R&D tax relief and to make greater use of their cloud computing to develop products and solutions. The government believe that giving businesses cash back for the creation, maintenance and storing of machine learning will enable them to redirect funds into other areas of R&D or allow additional money to be invested in new technology.

UK Innovation

Probably the biggest change to R&D is the restriction now to only those activities being ‘undertaken in the UK’ by externally provided workers (EPW’s). Workers will have to be on a ‘UK payroll’, and subcontracting work will have to be carried out in the UK for the associated costs to qualify for enhanced R&D tax relief. However, work undertaken overseas by a UK company is likely still to qualify, although we will know more when the draft legislation becomes law.

Impact and summary

The impact on clients is that they will need to keep clear records of time spent and details of the staff member who worked on each of their R&D projects and consider the R&D claim throughout the year, rather than as an end of year exercise with their tax advisor. It should ideally be considered at the start of your company’s accounting year so that you are able to adopt best practices;  adapt to the new changes; and keep a record appropriate for your claim.

The government hopes that these changes will refocus technology and research towards UK innovation. It’s the government’s aim to  increase investment in research and development to 2.4% of GDP by 2027, and an incentive for innovation for tech savvy firms is the main driver to reach this economic goal.

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