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Big changes to R&D tax reliefs

11 Feb 2022

HMRC has announced that from April 2023 several significant changes will be introduced to the R&D tax relief schemes. We are currently waiting for it to release the final details of how these changes will work in practice.

Amongst the changes being proposed are:

Subcontractor costs can only be included if the subcontracted activities are being carried out in the UK

Current legislation allows…..

If a UK company engages a subcontractor to undertake activities in relation to its qualifying R&D work, the costs charged for these activities can be included in the claiming company’s qualifying R&D expenditure regardless of where the activities are undertaken.

Proposed legislation will allow…..

Under the new proposals, these costs can only be included if the activities are undertaken in the UK.

Effects of changes

This change will have a major impact on UK-based companies who claim R&D tax relief but who utilise offshore subcontractors, or where they engage UK-based subcontractors which then further subcontract the work offshore.  In these cases, the subcontractor costs would not be allowable.  Any claiming company would need to carefully track where any work it has subcontracted is being performed.

Externally Provided Worker (EPW) costs can only be included in relation to workers paid in the UK

Current legislation allows…..

If a UK company making R&D tax relief claims uses a staffing agency, or other 3rd party, to provide it with workers (EPWs) for its R&D projects, the workers can be based anywhere worldwide.

Proposed legislation will allow…..

The proposed changes would mean that only EPWs paid through a UK payroll could be included in an R&D claim.

Effects of changes

Many companies undertaking R&D activities will use non-UK based EPWs as it may be more financially viable, a particular expertise may be unavailable in the UK, or the site of the R&D activities may be overseas.  Under the new proposals, all of these costs will have to be discounted if the EPWs in questions are not paid through a UK payroll.

Companies required to advise HMRC in advance of making a claim

Current legislation allows…..

A company has two years from its accounting period end to submit a claim for R&D tax relief.  It is quite a common occurrence for an R&D claim to be submitted towards the end of this two-year period as many companies do not realise that the activities they have undertaken could qualify for R&D tax relief.  Many companies miss making an R&D claim even with this generous timeline.

Proposed legislation will allow…..

Companies will need to inform HMRC, in advance, that they plan to make an R&D claim.  It is not yet clear what ‘in advance’ means.

Effects of changes

If ‘in advance’ means prior to undertaking the R&D activities or prior to the end of the accounting period in which the activities took place, then this will exclude companies from making retrospective claims and many companies will miss out.  Many companies are only aware of which parts of their work meet the criteria for a qualifying R&D project after the work has been undertaken and when they are discussing the previous period’s activities with their accountant/advisor.

HMRC has stated that this change has been proposed to ‘design out abuse and boundary-pushing while – so far as possible – limiting the impact on compliant businesses’.

This seems quite a drastic approach which will have a great impact on compliant businesses, and we are not entirely sure it will have much of an impact on lowering abuse and boundary pushing.

Claims will need to include details of any agent who has advised the company on compiling the claim

Current legislation allows for…..

There is no requirement for such disclosure which means that HMRC is unable to track trends in R&D advisors who are submitting dubious claims.

Proposed legislation will allow for…..

Any agent who has advised a company on compiling a claim will need to be documented within the claim.

Effects of changes

During recent years, the number of poor and unscrupulous R&D advisors has increased dramatically with some submitting vastly inflated claims or claims with no merit at all.  Without visibility of who assisted a company with its R&D claim, it is very difficult for HMRC to take steps to prevent this.

We always include our name on the supporting documentation for any claim we assist with, as do other reputable advisors, so we welcome this change.

If you have any questions on this blog or anything R&D related, please contact us at info@randdconsulting.co.uk.

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