UK and International Tax news

HMRC Issues Draft Guidance Update On R&D Tax Reliefs

Friday 21st April 2023

HMRC has issued draft updated guidance covering changes to R&D tax reliefs due to be implemented on 1 April 2023.

At Budget 2021, the government announced a review of R&D tax reliefs with the objectives of ensuring that the UK remained a competitive location for cutting edge research, that the reliefs continued to be fit for purpose, and that taxpayer money was effectively targeted.

HMRC opened a further consultation in December 2022 with draft guidance on reforms which include bringing pure mathematics research within scope of the reliefs, allowing data and cloud computing as qualifying costs, restricting expenditure on some overseas R&D activities and a package of measures to target abuse and improve compliance.

Responses to the latest consultation which closed on 28 February 2023 have been used to refine the draft guidance further. Key changes to both existing R&D tax regimes are covered below.

Overseas R&D

For accounting periods beginning on or after 1 April 2024 [deferred from 1 April 2023], to be qualifying expenditure, expenditure on payments to subcontractors is required to be UK expenditure, or to be qualifying overseas expenditure. This condition applies to the activities of the subcontractor being the person being paid to carry out the work.

To be qualifying expenditure, expenditure on payments for externally provided workers must be subject to PAYE and NICs, unless it is qualifying overseas expenditure. Qualifying overseas expenditure is expenditure on R&D undertaken outside the UK, where three particular factors apply, being:

  • the conditions necessary for the R&D are not present in the UK;
  • the conditions are present in the location where the R&D is undertaken;
  • it would be wholly unreasonable to replicate the conditions in the UK.

Data Licences and Cloud Computing Services

For accounting periods starting on or after 1 April 2023 data licence and cloud computing services costs can be qualifying expenditure when employed in activities which directly contribute to the resolution of scientific or technological uncertainty.

Where data or cloud services are used for multiple purposes within the business HMRC will accept a reasonable apportionment between different functions.

Claim Notification

For accounting periods starting on or after 1 April 2023, taxpayers will need to submit a Claim Notification form for their R&D claim to be valid if they are first time R&D claimants or R&D claimants who have not made an R&D claim in any of the previous three calendar years.

A Claim Notification form can be submitted from the first day of the accounting period to which the claim relates but must be submitted at the latest within six months after the end of the accounting period.

The Claim Notification form requires details of the claimant’s UTR, contact details of main internal R&D contact at the company, contact details of any agent involved in the R&D claim and agent reference number, period of account start and end dates, and accounting period start and end dates of the accounting period claiming R&D.

Mathematics

The definition of R&D for tax purposes is given in the BEIS guidelines and, prior to 1 April 2023, there was a limitation potentially preventing claims for advances in mathematics itself. This meant that it was unclear whether activities relating to pure mathematics met the definition and whether tax relief was unavailable.

From 1 April 2023, the BEIS guidelines have been updated to make clear that activities relating to pure mathematics will now meet the definition and are eligible for R&D tax reliefs.

Additional Information Form

For accounting periods starting on or after 1 April 2023, for an R&D tax relief claim to be valid, a customer must submit an Additional Information form before, or at the same time as, the claim.

The draft updated guidance will be formally published once the Finance Bill receives Royal Assent in the summer.

 

If you would like further information on HMRC’s latest guidance, please contact Keith Rushen on 0207 486 2378.

 

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