Major changes for R&D tax claims now confirmed: What does it mean for your claim?

The major changes, first touted in the 2022 Spring Statement, have been in consultation for the past few months but have now made their way into draft legislation and will be enacted in the Finance Bill 2022-23.

This means that from 1 April 2023 we will see major changes to both the Research and Development Expenditure Credit (RDEC) and the small or medium enterprises (SME) R&D reliefs.

Here, our R&D tax specialist, Paul Woodward summarises the changes and what they will mean for companies making R&D tax claims, as well as those considering making a claim.

There will be five key changes

1. Two new categories of qualifying expenditure:

• All cloud computing costs – Including purchase, access and maintenance of both software and hardware used for remote data storage and systems operation.
• Data costs – Including licences for access and collection of datasets used in R&D, like the ones used for machine learning.

Many businesses will benefit from this change, particularly those in tech and media, and it could mitigate the losses from the restrictions to overseas R&D costs (point 3 below).

As with other qualifying R&D costs, HMRC will expect these to be apportioned based on their use for R&D. So, you may consider ways of tracking which costs are in relation to your R&D effort, versus ‘business-as-usual’ activities.

2. R&D to include “pure mathematics” as a qualifying activity

To support the growing number of R&D underpinned by mathematical advances, the definition of R&D for tax incentives will expand to include pure mathematics as a qualifying cost. This change will support a number of sectors such as Artificial Intelligence, quantum computing and robotics.

You may wish to start monitoring and reporting any qualifying pure mathematics costs in your R&D, so that they can be assessed for inclusion in future claims.

3. Workers must be located in the UK

All subcontracted work or externally provided workers will need to be located in the UK in order to qualify for the scheme.

However, expenditure on overseas R&D activities can still potentially qualify if there are material factors such as geographical, environmental, demographic or regulatory conditions that are not present in the UK or where there are regulatory or other legal requirements that activities must take place outside of the UK, for example, clinical trials.

You may need to review your claim/s to assess if any of your R&D work is carried out abroad. Whilst the exceptions above are quite narrow, it may be useful to categorise whether your overseas R&D work falls into one of the exceptions and if it is carried out directly or via a third-party supplier. This will help you either rule out or make provisions for applying for permission to include it.

4. R&D claims to be filed digitally and break costs down across qualifying categories

All R&D tax relief claims will have to be made digitally starting from the next tax year (except from those companies exempt from the requirement to deliver a Company Tax Return online).

Digital claims will require a cost break-down across qualifying categories and a brief description of the R&D project(s) in question.

All claims will have to be endorsed by a named senior officer in the company, and details of any agent who has advised the company on filing the claim will have to be included.

We will be speaking to our clients who require us to file their R&D claims on their behalf to agree on how this will be handled moving forward.

5. If you haven’t made an R&D claim in the past 3 years, you will need to notify HMRC before making your claim

Companies will need to inform HMRC in advance, through a dedicated digital service, within 6 months of the end of the period for which they want to file their first R&D claim. Companies that have claimed in one of the previous three accounting periods are exempt from this requirement. This will involve logging in to an HMRC account (which you may need to set up) and then inputting the necessary data and backing narrative.