Changes to R&D tax relief claims coming into effect from April 2023

In March 2021, we posted an article relating to the introduction of a PAYE and NIC cap on research and development (R&D) tax credit claims. The changes made by HMRC came into effect in April 2021, aiming to reduce a growing number of fraudulent R&D claims.

Since the introduction of these rules, HMRC has been attempting to tackle R&D fraud in a number of ways. During 2021/22, most R&D claimants will have seen some quite significant delays in HMRC processing times due to additional internal fraud checks and some may have even received letters requesting further evidence supporting their R&D activity.

Whilst the PAYE and NIC cap has gone some way to deterring abuse of the R&D regime, the Government announced in the Autumn 2021 Budget that further reforms were necessary to not only improve compliance with the regime but to also refocus the relief towards driving innovation in the UK.

These notable changes will come into effect for accounting periods beginning on or after 1 April 2023 and will have an impact on the claim submission process, the tax relief available on overseas expenditure and the categories of qualifying expenditure that a business may include in their R&D claim.

Claim Submission – Registration
Under the current process, businesses are given two years from the end of their accounting period to claim R&D tax relief. However, from April 2023, any business wishing to claim R&D relief for the first time will need to notify HMRC within six months of the end of their financial year using a new digital service. This requirement will also apply to companies who have previously made R&D claims but haven’t done so for at least three years.

Businesses and agents wishing to make a claim for the first time will need to be more alert to the possibility of making a claim as failure to register is likely to result in businesses missing out. Once registered, the two-year submission timeframe will remain; it is the requirement to register that is key.

Companies already making R&D claims are unlikely to be affected by this change but if you’re a new business or you haven’t previously made a claim as you’re unsure whether or not you qualify for relief, now is the time to be seeking advice.

Claim Submission – Process
In conjunction with the registration requirement, changes will also be made to the way in which R&D claims are submitted as the process is digitalised.

The proposed changes come as no surprise – the current process allows companies to simply state the relief they believe they are entitled to on their tax return with little requirement to submit anything else. These changes intend to weed out fraud with the aim of making the R&D claim process clearer and more streamlined in the long run.

The new system will require businesses to submit their claims digitally and provide:

• Details of the qualifying expenditure incurred, together with details of the R&D activities being undertaken
• Endorsement of the claim by a named senior company officer
• Details of any agent the company has engaged to assist with the claim.

A majority of R&D agents, including Monahans, will already be used to providing this information in support of R&D claims but smaller businesses making their own submissions will need to be aware of these obligations for future claims.

Subcontractors and Overseas Activities
The third major change to the R&D regime is intended to narrow the focus of the relief to innovation carried out in the UK.

As things stand, costs incurred on R&D work carried out overseas can qualify for relief in the UK. From April 2023, expenditure on subcontracted R&D or costs of externally provided workers (EPWs) will only qualify to the extent that R&D activities are carried out in the UK.

This may come as a real challenge for certain companies who are struggling to recruit the specialist talent they need to undertake innovation or choosing to subcontract activities to reduce their labour costs.

Whilst there will be certain, limited exemptions from this change, businesses undertaking R&D activities outside of the UK should review their structure to understand the impact on future claims.

Cloud Computing, Data and Mathematics Activities
On a more positive note, HMRC is finally emerging from the dark ages in terms of its attitude to cloud computing and data costs. Many technology businesses, particularly those in the AI sector, will know that cloud computing and data costs are significant and are an integral part of innovation. However, this type of expenditure hasn’t historically met the qualifying R&D cost criteria. This will change in April 2023.

Care will need to be taken to ensure appropriate costs are claimed but this will come as a very welcome change for many.

In addition to this, HMRC has confirmed that activities involving pure mathematics will be eligible activities for R&D purposes from April 2023. It is expected that businesses within the finance sector will benefit from this change but it may have a far wider reach including the promotion of developments in STEM areas such as coding.

These announcements significantly change the ways in which R&D tax relief is claimed, so businesses have their work cut out to be up to speed by April 2023. But, as the adage, goes, ‘short term pain leads to long term gain’ and the measures have been put in place to make the process of claiming R&D tax relief fairer and more efficient. So, we should hopefully see a positive change to the experience of claiming this relief in the future.

If you would like any advice on whether you qualify for R&D tax relief or on making a claim, please get in touch today.

Stephanie Hurst