The government has released a report documenting significant changes to the R&D tax relief scheme.
The report provides further context to Chancellor Rishi Sunak’s announcement in the 2021 Autumn Budget when he said that the scheme would be altered to:
- Support modern research methods by expanding qualifying expenditure to include data and cloud costs.
- More effectively capture the benefits of R&D funded by the reliefs through refocusing support towards innovation in the UK.
- Target abuse and improve compliance.
These reforms are fast approaching, so it’s crucial that you understand how they impact the way you claim and your claim size.
We’ve broken down everything you need to know…
#1 Cloud computing and data – More costs you can claim for in the future
Cloud computing and data will be added as qualifying R&D costs. Consequently, if you deal with a lot of data or keep it in the cloud, you should be able to include these new expenses on your future claims.
Cloud computing and data are essential for all modern innovations, so it’s encouraging to see them introduced.
Here are the three types of qualifying costs for cloud computing and data:
- License payments for datasets (not if they can be resold or have lasting value to the business).
- Costs for staff-related expenditure to collect, cleanse and analyse data, provided these costs are incurred for a qualifying R&D project.
- Cloud computing costs that can be attributed to computation, data processing and software.
Get in touch with our team to understand how the introduction of cloud computing and data could drastically increase your claim size.
We can help you determine the size of your future claim, shedding light on your projected financial plan and giving you more time to adapt your strategy.
#2 Refocus R&D tax relief towards innovation in the UK
As things stand, you can claim R&D tax relief on R&D activity carried outside the UK. However, the government will be changing this rule for both the SME and RDEC scheme.
If you outsource R&D work to a third party outside the UK, it’s vital that you read below because this change could substantially affect your future claim.
What impact will this regulation have?
- In the future, companies that outsource R&D work to a third party will only be able to claim R&D tax relief for those costs if the third party performs the task within the UK in the future. The rules for subcontracting will not otherwise change. This will apply to the SME scheme, and a similar principle will apply in RDEC, where subcontracting occurs, and a company claims for contributions it makes for independent R&D of a qualifying body.
- Under both schemes, where companies incur expenditure on payments for externally provided workers (EPWs), they will only be able to claim relief on such spending where those workers are paid through a UK payroll.
- Companies will still be able to claim R&D tax reliefs on the costs of software and consumables sourced overseas and payments for data and cloud-sourced overseas, as these are considered inputs to activity in the UK.
If you are unclear about any information, speak to our team to discuss your claim.
#3 To be compliant, your claim must be more robust and comprehensive
The government has also devised a plan to crack down on fraudulent claims and ward companies off from making future attempts to claim money from the R&D scheme on false pretences.
What changes are coming?
- HMRC will further increase R&D tax credit compliance resources by creating a new cross-cutting team focused on abuse.
- All claims for R&D reliefs – either for a deduction or a tax credit – will in future have to be made digitally (except those companies exempt from the requirement to deliver a Company Tax Return online)
- These digital claims will in future require more detail – for example, on what expenditure the claim covers, the nature of the advance sought, the field of science or technology, the uncertainties overcome.
- 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.
This plan is already in action. The number of HMRC enquiries increased in 2021, making choosing who handles your claim more important than ever.
For instance, your technical narrative will now need to be more comprehensive. You’re required to detail how you sought an advance in science or technology and demonstrate that you overcame uncertainty to do so.
That’s why working with a provider that gives you a complete service, covering both the cost and the technical narrative, has become more crucial than ever. With the added scrutiny, working with an accountant and writing the technical narrative yourself could put your claim at risk.
At EmpowerRD, we’ve created a process that combines experienced and skilled former HMRC inspectors and tax R&D experts with an intelligent platform to ensure your claim is robust, optimised and that you receive the greatest return.
We help you work out all of your qualifying costs, allow you to capture the critical information for your technical narrative, and then get our experienced technical team to write up your narrative, making sure it’s robust and compliant enough to meet HMRC’s standards.
If you’d like to learn more about how to make sure your claim is robust and optimised, get in touch and speak with one of our experts.
With the new changes coming into effect soon, as well as more to come, it’s more important than ever to adopt a robust approach to claiming R&D tax credits. If you don’t, you run a higher risk of an enquiry from HMRC and your claim being unsuccessful.
What’s more, if your current provider is unaware of these changes, they could make you miss out on a larger claim size.
It is well within your interest to explore these changes in detail as they may impact your business. For instance, you might be used to claiming a certain amount, but the changes could dramatically alter the claim size. This will have a knock-on effect on your financial plan and how you choose to steer your business over the next few years.
As one of four trusted advisors sitting on HMRC’s R&D Consultative Committee, we have unique insight into the current and forthcoming changes to the scheme, so it’s worth checking in with us just for your peace of mind.
Get in touch now, and we’ll be happy to answer any questions you have.