The big R&D tax relief changes, accountants need to act now

April is arriving soon, implying that the HMRC’s surprising act of new requirements for the Research & Development (R&D) tax relief claims will hit the industry soon.

The industry has much speculation and buzz regarding this amendment, and rumours are spreading fast. Hence, do not take any steps unless you get an official announcement from the authorities.

The draft legislation went on air to announce that the changes would be significant and could change the claims drastically earlier this year. The amendments in the claims will have huge effects on accountants .

The changes will be effective from or after 1 April 2023 for both the SME and RDEC schemes.

What changes are to be noted?

According to the speculations around the amendments,  a well-elaborated report explaining the R&D activities and how they come under the HMRC legislation has to be attached to the research and development claim. You will have to upload a copy of the report on the online portal. The report must contain the name of all the advisors. Lastly, the final report must be duly signed by a senior officer at the claimant company.

Tax Advisor

We have another breaker for you if you are already saturated and overwhelmed by these updates. All the companies who are going to make the research and development claim must notify the HMRC in advance.

The notification must be sent to the HMRC within six months of the end of the accounting period under which the claim falls. Although this comes with relaxation, you don’t need to inform the HMRC if the R&D  claim falls in any of the three previous accounting periods.

You don’t need to be sure when giving the initial notice to the HMRC; if the company fails to make a claim, there is no penalty. But, you will have to re-notify the HMRC if you wish to make a claim again. The time for making the actual claim is two years from the end of the accounting period.

We know that the piece of information shared above is not satisfying for you as there are still some questions left in your mind. You might need more clarity on the entire notification process will work and what will be the prerequisites and format for this. At this moment, we don’t even know whether this initial notification has to be submitted virtually or whether an advisor needs to send it on the client’s behalf.

Just a heads up, Why is all this happening?

The HMRC is taking all these measures as it suspects that some businesses have been exploiting the R&D tax relief scheme. Approximately £300 million has been lost under this scheme because of false claims made between 2020 and 2021.

The HMRC increased the compliance checks and investigations, because of which the average time it takes to pay tax credits has increased from 28 to 40 days.

Changes with respect to the eligibility criteria

Most of the changes with respect to the accounting periods beginning on or after 1 April 2023 are linked to the unfair means associated with the scheme, though some other changes are being made to the eligibility related to claiming the research and development tax relief.

1. Data storage and cloud computing expenses

The legislation is being updated positively, as the data sets and cloud computing costs for the accounting period commencing on or after 1 April 2023 can also be added to the R&D tax claim. Data claims can be made when a company buys data solely for research and development, only if it doesn’t have any resale value or lasting value to the company.

Businesses can also claim the cost of cloud computing services and cloud storage costs spent on research and development. Data storage and computing costs can only be claimed if they are directly related to R&D support activities. The data storage and computing costs for HR and finance purposes cannot be included under R&D.

2. Exclusion of R&D costs for activities taking place overseas
The Government concluded that the R&D tax relief scheme wasn’t benefitting the UK to the maximum value as they expected it to. Hence, for the accounting period commencing from 1 April, subcontractor and externally provided worker activities taking place overseas will no longer be included under the R&D claim.

However, there are a few exemptions here also. This is applicable only if the material factors, for instance, the geography, environment, population or other similar conditions — required for the research and development project are not situated within the boundaries of the UK. For example, Let’s consider the example of deep ocean research.

One more exception is when regulatory or legal requirements mean activities must take place outside the UK, for example, the clinical trials of drugs or vaccines.

Tax Advisor

Summing up

There is no ambiguity that these changes will inevitably affect accountants. There could be a few more changes in the queue, along with an all-new qualifying activity of pure mathematics; this needs to be included in the legislation.

It is anticipated that a few changes related to the RDEC scheme might also be declared in the autumn. Hence, keep following any official announcements issued, so you don’t miss any critical deadlines.

Experlu Editorial Team
The editorial team at Experlu is comprised of seasoned financial professionals dedicated to providing high-quality content on accounting and finance. With a wealth of experience and diverse expertise, the team produces insightful articles that have established the Experlu blog as the UK's leading financial and accounting resource. The team includes accountants, auditors, and business advisors who stay updated with the latest industry developments. Their commitment to excellence ensures that Experlu remains a trusted source of information, helping readers stay informed about audit, business, finance, and tax matters.