As part of the Autumn Budget announced on 30 November 2021, the Government released further details of the proposed changes to the UK R&D schemes while also  publishing responses to an earlier consultation aimed at shaping the future of R&D supports in the UK. Johnny Hanna of our Tax team explains.

The proposed changes are aimed at ensuring the UK remains a competitive location for cutting edge research, with the reliefs being fit for purpose and providing effective use of taxpayer funds.  The changes aim to modernise the schemes to include expenditure on data and cloud computing costs and to provide more of a focus on R&D activities actually undertaken in the UK as opposed to activities carried on overseas. This was to target perceived abuses, and to introduce additional measures aimed at improving the compliance process.  There are also some additional changes to address certain anomalies in the existing R&D legislation.

The Government is consulting on the detail of the proposed changes and intends that they will be included in  Finance Bill 2022-23 with the measures to take effect from 1 April 2023. 

Data and cloud computing costs

Following a consultation in July 2020, qualifying expenditure under both R&D schemes will be expanded to include licence payments for data and cloud computing costs from 1 April 2023, so as to incentivise cutting edge R&D methods relying on vast amounts of data that are processed via the cloud. The expanded categories will include:

  • Licence payments for data sets which are made for purchasing data used directly for R&D.
  • Costs of data sets that provide an enduring benefit to the business beyond the R&D project or which can be resold will not qualify for relief.
  • Where multiple data sets are obtained with a mixture of qualifying and non-qualifying elements an apportionment method will need to be applied.
  • Staffing costs of creating data sets purely for R&D purposes continue to be costs qualifying for relief, and the government intends to revise its guidance to clarify this position.
  • The costs of cloud computing directly used in R&D (e.g. the use of third party processing capacity and analytical tools to interrogate data).
  • Where a cloud computing package offers a range of functions it will be necessary to distinguish the costs that relate directly to the R&D activities from non-R&D related activities.  Claimants will likely need to identify these costs based on billing details from suppliers or using an appropriate apportionment.

Key points 

  • New and existing agreements covering licence payments for data sets should be reviewed ahead of April 2023 to ensure the benefits conferred by licence agreements will not restrict the availability of R&D relief
  •  Where cloud computing costs are being used in R&D activities from 1 April 2023 it will be necessary to identify the costs that relate directly to the qualifying R&D activities to ensure they can be included in the claim. 
  •  Staff costs on building data sets purely for use in qualifying R&D activities are already treated as qualifying expenditure. 

Focusing R&D reliefs on UK activities

The UK’s R&D schemes have been relatively broad in terms of the location in which R&D activities are carried out compared to other jurisdictions, with a large proportion of R&D activities on which claims are made taking place outside of the UK.

The government is therefore taking steps to narrow the scope of R&D activities to ensure there is a greater focus on R&D undertaken within the UK.

The current legislation allows claims where R&D activities are subcontracted by a UK company to a third party, or where externally provided workers are utilised to carry out R&D activities, the costs (subject to restrictions within current legislation) qualify regardless of whether the R&D activities take place within the UK or in an overseas jurisdiction.

The proposed changes intend that:

  • Where R&D activities are subcontracted to a third party the costs will only qualify for relief under the R&D schemes where the third party performs the work in the UK.
  • For externally provided workers a relief will only be available where the workers are paid through a UK payroll.

The underlying criteria for costs incurred on subcontracted work and externally provided workers as qualifying expenditure under both schemes is not being changed with the exception of the location of those services being carried out.

Costs incurred by companies on software, consumables, payments for clinical trials volunteers, data and cloud computing source overseas will continue to be qualifying expenditure on the basis that they are considered to be inputs into activity in the UK.

Key points

  • Consideration should be given to using UK base subcontractors and externally provided workers from 1 April 2023 rather than non-UK equivalents due to the restriction of relief being introduced.
  • Tracking expenditure and agreeing with suppliers where the work is undertaken may become critically important.

Abuse and compliance

Due to growing concern in recent years over abuse of the R&D schemes and boundary pushing, raised by both the National Audit Office and respondents to HMRC’s recent consultations on R&D, the government is aiming to reduce such practices.

One particular area of concern is the emergence of R&D advisers that are not members of professional bodies, operate by cold calling potential clients, charge on a commission basis and submit numerous “dubious” claims.

HMRC have already been allocating additional resources to R&D tax relief compliance, with more claims coming under greater scrutiny, and intends to further increase these resources and to implement additional measures as outlined below:

  • All future claims will have to be made digitally, with a small number of exceptions.
  • Further detail will be required in future claims in relation to expenditure included in the claim and technical aspects of the work undertaken.
  • Claims will need to be endorsed by a named senior member of the claimant company.
  • Claimants will need to inform HMRC in advance of making claims.
  • Claims will need to include details of any agent that has advised the company on compiling the claim.

Key points

  • Due to the additional compliance requirements and greater scrutiny from HMRC being introduced, using a reputable agent with significant experience in compiling robust claims is now more important than ever.  Claimant companies will have to inform HMRC of the details of any agent advising on compiling the claim.
  • Claimant companies will have to notify HMRC in advance of making an R&D claim.
  • A named senior member of claimant companies will be required to endorse R&D claims.

Additional measures to address anomalies in the R&D schemes

HMRC have acknowledged that there are a number of anomalies within the legislation that affect the operation of the reliefs, and intends to address these in the following ways:

  • It will be possible to increase or decrease RDEC claims appropriately following certain types of assessment made by HMRC, which was previously only possible under the SME scheme.
  • Companies will be allowed to claim RDEC on expenditure for which SME claims have previously been incorrectly made.
  • To provide clarification that expenditure generally qualifies where a payment is made within two years of the end of the accounting period.
  • Confirm that the time limit for making a claim will be changed to 12 months from the statutory filing date.
  • To allow all companies in a group where an SME becomes large to retain their SME status for one year afterwards, rather than losing the SME status straight away.
  • To change the rule whereby a company must be a going concern to obtain the reliefs to focus on businesses that are unviable rather than being based on an accounting definition.

Key points

  • The rules around updating RDEC claims following assessments and claims made under the SME scheme erroneously are changing.
  • Companies within a group where one SME company becomes large to be allowed to retain their SME status for an additional year.


HMRC are introducing a variety of changes to the R&D schemes from April 2023.  The findings from the latest consultation may still result in further additional changes being made, and the details of how the changes are to be made are still uncertain in some cases.

Whilst there are changes to expand the scope of R&D to include data and cloud computing costs, a change that has been anticipated for a while, the increased focus on UK based R&D activities and the ever-increasing scrutiny and compliance requirements on R&D claims mean it is important for companies expecting to make claims covering periods after 1 April 2023 to proactively manage the limitations and expectations for these claims.

KPMG have significant experience of advising on, compiling and submitting R&D claims under both the SME and RDEC schemes to HMRC.  Our approach interrogates the technical integrity of the scientific and technological aspects of the claims as well as reviewing the financial information in detail to ensure the appropriate categories of expenditure are captured, to maximise R&D claims within the framework of the legislation.

Get in touch

The pace of change is challenging leaders like never before. To find out more about how KPMG perspectives and fresh thinking can help you focus on what’s next for your business or organisation, please get in touch with Johnny Hanna of our Tax team. We’d be delighted to hear from you.