Following an announcement at the Autumn Budget 2021 and an earlier consultation, the Government has set out plans for several changes to the qualifying criteria for enhanced tax relief for research and development (R&D) activities, alongside the introduction of tough new anti-abuse measures. These changes are proposed to take effect from 1 April 2023.
Extension of relief for data-related expenditure
The Government has confirmed that several additional categories of data-related expenditure will now qualify for enhanced R&D tax relief, including in particular:
- expenditure via licence payments on purchasing datasets which are used directly for R&D in a qualifying R&D project will qualify for relief, but not where the datasets can be resold or have a lasting value to the business beyond the duration of the R&D project
- staff costs related to collecting, cleansing and analysing data
- cloud computing services used directly for R&D, but not the costs of data storage
Restriction of relief for non-UK based R&D activity
Conversely, enhanced relief for non-UK based R&D will now no longer be available. Relief will only be available in respect of staff paid through the UK payroll, and for subcontracted R&D, only where the third party performs the work within the UK. However, companies will still be able to claim for certain non-UK costs that are considered to be inputs to UK-based R&D, including in particular:
- software and consumables sourced from outside of the UK
- data and cloud computing services sourced from outside of the UK
- non-UK based clinical trial volunteers
Despite these new restrictions, HM Treasury states that the Government “is interested in views from stakeholders on whether there is a case for any narrow exceptions to allow claims on some overseas activity. However, these would not include allowing claims for overseas activity on the basis that it is less expensive than in the UK.” Views from stakeholders are expected to be sought alongside the publication of draft legislation in the summer of 2022.
Tackling abuse and non-compliance
Estimating that error and fraud related to enhanced R&D relief claims comes at a cost of £311m, with growth in the number of unqualified/unregulated R&D advisers creating more spurious claims, HMRC is already working on additional measures to identify potential fraudulent claims and will ramp up activity in this area. A new HMRC team is being created, focused on tackling abuse, and in addition, from 1 April 2023:
- all claims for enhanced R&D tax reliefs will have to be made digitally, and accompanied by additional detail
- each claim will need to be endorsed by a named senior officer of the company
- companies will need to inform HMRC, in advance, that they plan to make a claim
- claims will need to include details of any agent who has advised the company on compiling the claim