As we predicted in our recent article about the Autumn Budget , following a policy review, the Government has announced some significant changes to the R&D Tax Credits scheme via a report that they recently published.
These changes will be included in the 2022-23 Finance Bill and will take effect from April 2023.
In this article we explore what the announced changes are and what they might mean to you.
Cloud and Data Costs
- licence payments for datasets
- cloud computing costs used for computation, data processing and software (e.g. AWS, Google Cloud, etc).
This means that companies can include licensing costs of data sets that they use exclusively for the purpose of an R&D project (for example when a dataset is used to ‘train’ a machine-learning application through an algorithm). They cannot include this cost if the dataset is subsequently resold or is used on an ongoing basis. Fieldwork to build the datasets is already allowable as a Qualifying Indirect Activity.
Similarly, 3rd party cloud providers needed for R&D activities will also become allowable (for example when needing to utilise the added processing power of a cloud provider or utilising cloud-based neural networks or analytics tools), but the Government have explicitly excluded overheads that would include, for example, any hosting element.
The Government has advised that they would like to consider further views from stakeholders. As in the original research carried out, Innovation Plus intends to respond and is keen to hear your views.
If a company subcontracts their R&D activities to another company or person that is located overseas, this will no longer be qualifying expenditure under the SME scheme. While RDEC claims do not have subcontracted expenditure as a qualifying cost category, Externally Provided Workers (e.g. contractors) which are a feature of both the SME and RDEC schemes, will have to be paid through a UK payroll in order to qualify.
While this change comes as no surprise (as it has been hinted at for some time), there was some ongoing speculation as to whether the Treasury would actually take the leap and implement this wide-reaching change. While we see the argument for making this change, there is no doubt that this measure will impact some UK-based companies that are performing genuine innovation where the ability to perform some of their R&D overseas has helped them to remain competitive internationally.
The Treasury also has also asked for feedback on potential exceptions to this measure. We would welcome your suggestions on this.
Tackling Abuse and non-compliance
The Treasury has acknowledged that companies that make fraudulent or non-compliant R&D claims cause HMRC to lose around £311 million every year. They go on to single out one of the most prevalent sources of dubious claims: Providers that don’t have sufficient experience in claim legislation and preparation and those that are willing to push past the boundaries of eligibility in the hope of earning a commission regardless of whether the work truly qualifies for the scheme or not:
“…These advisers, many with no background in tax, take advantage of customers who are unfamiliar with claiming for R&D, often charging on a commission basis, and submit numerous dubious claims. The commission basis can lead companies to view a claim as cost-free and some are willing to accept questionable claims.”
In response, the Treasury has announced that they will be taking the following measures to combat this:
- All R&D claims must now be submitted digitally. This was likely done so that in the case of an enquiry, HMRC will have a digital audit trail and a clearer understanding of the parties involved in preparing and submitting the claim.
- Claimant companies will need to provide more detailed information on the nature of the eligible expenditure, the technological advances that were sought and the uncertainties that were overcome during the R&D activities.
- HMRC is going to expect a higher level of accountability from claimant companies by requiring senior officer of the company to sign-off on claims before submitting them. Presumably this is to avoid a scenario where the claimant company will seek to distance themselves from the decisions that were made by external providers in the event of an enquiry.
- Lastly, HMRC will also require that claims will include details of the agent that prepared the claim. While any liability that results from an incorrect claim will still ultimately fall to the claimant company, this measure was likely taken to assist HMRC develop its list of high risk advisers that prepare low-quality claims. This will help them closely scrutinise any other claims prepared by those advisers. We recommend claimant companies to check how many enquiries your R&D adviser gets per year.
The Treasury is clearly more determined than ever to tackle the issue of low-quality, incorrect and fraudulent R&D Tax Credit claims. It’s not clear whether excluding offshore expenditure will prove to be effective or too much of a ‘blunt’ tool that is unfairly punitive. Time will tell.
HMRC are clearly tightening up their processes for reviewing claims and are expecting higher levels of accountability for both claimant companies and agents. Ultimately, we think this is a good thing – taxpayers should only be funding genuine innovation that is likely to benefit the economy.
The Innovation Plus team has specialised exclusively on the R&D Tax Credits since 2009. Our team has prepared over 1,200 claims and has in-depth knowledge of the technical and legislative aspects of the scheme with what we believe is the lowest enquiry rate in the industry. This allows us to produce claims that have the highest level of compliance while retaining their maximum value. To speak to a member of our team regarding your own R&D claim position, contact us.