Following announcements at the Autumn Budget 2021, on 20 July 2022, the Government published draft legislation including significant changes to the eligibility of costs for enhanced R&D tax relief. In particular, these include:

  • Inclusion of data and cloud computing expenditure as a new category of eligible costs
  • “Refocusing” towards innovation in the UK
  • Expanding the definition of R&D to include all mathematics, and specifically including pure mathematics

Refocus on UK R&D, excluding non-UK expenditure

With limited exceptions, only the UK element of subcontracted R&D expenditure and payments for externally provided workers (EPWs) will only qualify for inclusion in a claim. Subcontracted work must take place in the UK and EPWs must be subject to UK PAYE.

The exceptions from this exclusion may apply where there are:

  • material factors such as geography, environment, population or other conditions that are not present in the UK and are required for the research, meaning expenditure must take place outside of the UK, e.g., deep ocean research, or
  • regulatory or other legal requirements that activities must take place outside of the UK, e.g., clinical trials.

These restrictions will apply for a company’s first claim for a period beginning on or after 1 April 2023. For example, a company with a 31 December year-end will first be subject to the restrictions for the year ending 31 December 2024.

HMRC compliance approach

As part of HMRC’s ongoing focus on improving compliance in relation to R&D tax relief claims, additional measures are also being introduced, including mandatory descriptive submissions and pre-notification of new claims (within six months of the end of the claim period).

While HMRC have recently been delaying the release of repayments following the submission of R&D tax relief claims, HMRC have now provided an update that they are approaching return to a more ‘normal’ approach to claim processing. However, this is now expected to involve an extended target turnaround, being 40 days rather than the previous 28 days.