L Day: Draft legislation published for R&D tax changes planned for 2023
The draft legislation covers important changes to both the R&D Expenditure Credit for large companies and the SME R&D regimes.
The draft legislation covers important changes to both the R&D Expenditure Credit
Draft legislation was published on 20 July 2022 including significant changes to research and development (R&D) tax incentives, as previously announced in autumn 2021. The reforms detailed below are intended to be effective for accounting periods beginning on or after 1 April 2023. The draft legislation covers changes to both the R&D Expenditure Credit (RDEC) for large companies and the SME R&D regimes. Broadly, the changes include the following measures: refocusing relief towards innovation in the UK; extension of the scope of R&D to include data and cloud computing expenditure and the extension of the R&D definition to include pure mathematics; tackling abuse and improving compliance; and miscellaneous considerations to address anomalies and unforeseen consequences. HMRC have requested feedback on the draft legislation by 24 September. It is intended the legislation will be enacted in Finance Bill 2022-23.
What does the new draft legislation say?
Refocusing reliefs towards innovation in the UK
As previously announced, the Government are refocusing R&D tax incentives on UK R&D activity and are restricting any reliefs for overseas activity. Expenditure on subcontracted R&D, contributions to independent research (RDEC only) and the cost of externally provided workers will be limited to UK activity and narrowly defined ‘qualifying overseas expenditure’. Qualifying overseas expenditure will be limited to situations where it would be wholly unreasonable to undertake the R&D in the UK due to geography, environment, or social factors or where there are regulatory requirements for certain activities to take place in specific territories (e.g. clinical trials). The draft legislation specifically rules out ‘cost’ or ‘workforce availability’ as reasons to class expenditure as qualifying overseas expenditure.
Extension of qualifying expenditure categories to data and cloud computing costs and pure mathematics
The Government is extending the scope of qualifying expenditure to include:
- Licence payments to access and use digital data; and
- Cloud computing services that include the provision of access to, or maintenance of remote data storage, operating systems, software platforms and hardware facilities.
The costs must be directly linked to R&D activity and there are restrictions over costs where under the licence the company has the right to sell, publicise, share, or communicate the data to other thirds parties for purposes other than R&D.
The Government also proposes to extend the definition of R&D to include pure mathematics, and this will be addressed with secondary legislation yet to be published.
Tackling abuse and improving compliance
Changes are being made, aimed at targeting abuse in both regimes and improving compliance, including:
- R&D claims to be made digitally through HMRC’s tax return portal;
- ‘New’ claimants will be required to make a claim notification within six months of the end of claim period or the claim will be invalid. Companies that have claimed (or made a notification) in respect of one of the preceding three accounting periods will not be considered ‘new’ thus will not need to pre-notify; and
- Claims will need to include details of any agent who has advised the company on compiling the claim.
HMRC have not yet specified the exact information to be provided with the notification, nor the form or mechanism by which the notification must be made. This will be provided through secondary legislation.
Miscellaneous considerations
Several changes are also proposed to correct anomalies and ensure the reliefs operate as intended. These include:
- Costs incurred by R&D claimants on the new Health and Social Care Levy (HSCL) will be treated in the same way as costs incurred on NIC;
- Relaxation of the ‘Going Concern’ requirement such that companies that have transferred a trade to a connected party can still be eligible for R&D relief;
- Legislating for HMRC’s published practice that R&D expenditure must be paid prior to the making of a claim;
- Enabling companies to amend SME claims to RDEC where the original claim was made in error outside of the usual two-year time limit; and
- Clarifications around the transitional rules for SME claims including where a company is sold from a large group to an SME group, the company can access SME relief in year of transaction.
The above represent significant changes to both the structure and administration of the R&D tax incentives regimes. We would recommend that R&D claimants get professional advice to understand the implications for future claims and to take actions to ensure the processes for making claims are compliant and supportable. Companies have until 14 September 2022 to feedback comments to HMRC or alternatively to feedback to their KPMG contact so we can consider including any comments in our response to HMRC.
