This year has brought the most significant changes to the regime for Research and Development (R&D) tax relief since it was introduced in the year 2000, with changes to the rates of relief and tightening up of the compliance system for claiming the relief.
Rates of Relief
From 1 April 2023 the rates of R&D enhancement uplift and tax credits have been reduced from 130% to 86% and from 14.5% to 10% respectively. There is however an increased rate of tax credit of 14.5% for what are described as “R&D intensive companies”, which are companies which incur qualifying R&D expenditure representing at least 40% of their total expenditure (not including amounts disallowable for corporation tax). Where an accounting period spans 1 April 2023, it will be necessary to apportion costs between the period before and after that date by reference to the part of the period when the relevant costs were incurred, and if it can be demonstrated that they were constant throughout the accounting period, HMRC will allow a “hybrid rate” to be applied to the total (e.g. 108% enhancement for a twelve month period ending 30 September 2023). This exercise will involve careful and detailed analysis. It will be noted that the rate of relief in terms of tax related to costs will be greater for periods after 31 March 2023 where the profits are over £50k owing to the new 25% tax rate, which will compensate for the reduction in the rates of relief in those cases.
Extension of qualifying expenditure
Two new categories of expenditure now qualify for enhancement:
- Datasets
- Cloud computing
Extension of qualifying activity
The definition of what constitutes R&D has been extended to include “pure mathematics”. The HMRC “Guidelines on the Meaning of R&D for Tax Purposes” has been updated to say that “mathematical techniques are frequently used in science. From April 2023 mathematical advances in themselves are treated as science for the purposes of these Guidelines, whether or not they are advances in representing the nature and behaviour of the physical and material universe”.
Territorial restrictions
R&D costs eligible for enhanced relief were originally scheduled to be limited to work undertaken in the UK from 1 April 2023, but this was put back by one year to 1 April 2024. This means that any work carried out outside the UK after 1 April 2024 will not qualify. There are a very restricted exceptions to this rule, but these do not include cost savings or lack of suitable workers in the UK.
Compliance
R&D has been an area where innovative companies have been able to obtain thousands of pounds of tax relief and this has made it a target for certain tax consultants who have found it to be a lucrative source of fees, by charging a percentage of tax savings extracted from HMRC through dubious claims, which would not stand up to scrutiny if they were checked by HMRC. In the past, most claims have been successful owing to the lack of resource at HMRC to police them, but HMRC have been aware for some time that the market had developed into somewhat of a “wild west” which needed to be more rigorously controlled and have therefore now brought in provisions, which they hope will stop exploitation by the more aggressive players in the market.
Reporting claims for R&D relief
Claims for R&D relief made on or after 8 August 2023 must be made online in a prescribed format known as an “additional information form”. Details of the information that will be required to be included in the submission have been set out in HMRC Guidance and these are generally along the lines of previous guidance which has been followed by bona fide agents for some time. The only way to avoid using the new system will be to submit the corporation tax return for the period concerned, with the report prepared as previously, before 8 August. If a tax return is submitted after that date with a claim for R&D relief, the claim will be rejected, unless an additional information form has also been submitted.
Advance Assurance
The process of applying for Advance Assurance has previously been available to most SMEs, and this can still be done in most cases either online or by posting a form which has been completed on screen. It will normally result in communication from HMRC leading to a request for further information by email or telephone discussion.
Advance Notification
In addition to the online additional information form referred to above, there is a requirement for claimants to notify HMRC in advance of their intention to make a claim for an accounting period beginning on or after 1 April 2023. The window for making this notification opens on the first day of the period and ends six months after the end of the period. The purpose of this is to obstruct consultants who are in the habit of making claims in retrospect, but within the two-year period after the end of the period which is allowed for making claims. The advance notification will need to include limited details of the qualifying project with a view to demonstrating that it meets the criteria for the relief. There is an exception to this requirement, which is where the actual claim is made within six months after the end of the accounting period and the company has made a claim in the three years preceding the end of the claim notification period.
Increase in HMRC enquiries into claims
HMRC are increasing the resources for reviewing claims, including a proportion of random checks, and we can therefore expect more push back from them when submitting claims, particularly larger ones. It is important to be able to show for a project what the current baseline is for the technological/scientific area that is being worked on, what the advance is that is being sought and the uncertainties that are having to be overcome. This should involve being able to demonstrate that “competent professionals” have been used to ensure that the project does actually involve an advance and have carried out sufficient research to ensure that the work being undertaken is the most effective way of achieving the advance. The report should be as concise as possible and avoid generalities, and care should be taken over the apportionment of staff costs as HMRC feel that it is unlikely that a worker will spend the whole of their time working on the technological/scientific advance but will almost inevitably have done some work such as in researching the level of existing knowledge before embarking on the project. The new regime for Advance Assurance and Notification will actually go some way to helping avoid over-claims as there should be feedback from HMRC before the tax return is submitted.
Author: Jake Standing, Director
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Date published: 18 July 2023