The total number of Research and Development (R&D) tax claims increased by 10.54% from 2021-22 on 2020-21 with abuse still rife, Her Majesty's Revenue and Custom (HMRC) priority to tackle dubious claims have seen delays to processing times.
A greatly anticipated Research & Development Communication Forum (RDCF formerly RDCC) took place on 13th July 2022. This biannual event enables R&D agents and accountants to discuss the current and future points to existing and new funding and compliance and technical points regarding Research & Development Tax Relief (RD&TR) and Research & Development Expenditure Credit (RDEC) incentives with delegates from HMRC and Department for Business, Energy and Industrial Strategy (BEIS).
It was highlighted that whilst 98% of Research & Development Tax Credit (RDTC) claims (42,073 in total during 2021-22) were paid within 28 days, HMRC have temporarily increased the processing ambition to 40 days. However, for those of us that are in support of eliminating abuse the delays are somewhat immaterial and a slight adjustment to sale pitches is all that’s required.
I have summarised the key points between R&D tax updates and general BEIS funding below:
Eligible expenditure and activity of UK R&D Tax
- Cloud and Data costs to include ALL associated costs in relation to data rich projects, this includes data storage costs.
- Plans remain to increase the generosity of RDEC; however, no further details were provided.
- The definition of R&D to be expanded to include pure mathematics research.
- Restrictions on overseas spend to still be enforced with narrow exemptions whereby “it is unavoidable for the R&D activity to be undertaken overseas.” These are as follows:
- “material factors such as geography, environment, population or other conditions that are not present in the United Kingdom (UK) and are required for the research, meaning expenditure must take place outside of the UK – for example, deep ocean research”
- “regulatory or other legal requirements that activities must take place outside of the UK, for example, clinical trials.”
- Legislation regarding a Small and Medium Enterprises (SME) in a group that has become large the year of grace will apply, currently the transition from SME to RDEC is instant.
- Technical changes to the treatment of reliefs within a system of two corporation tax rates to be made to legislation.
Target abuse and improve compliance of UK R&D Tax
- Current guidance recommends information that should be submitted alongside the deduction. It was again highlighted this will be a requirement and information required will include:
- The technological and scientific advance sought
- Field of science or technology
- How the uncertainties were overcome
- Claims and advance notification to be made digitally, intention to claim must be notified within 6 months of the end of the accounting period, unless a company has claimed in any one of the last three years. No issues will arise where a company makes an advanced notification to HMRC and subsequently does not file R&D tax claim submission, however a new notification will need to be made for the next accounting period where a claim is to be made. It should be noted the advanced notification is not the same as advance assurance and notification is simply received by HMRC allowing a claim to be made – no preapproval is granted.
- R&D agent details to be provided if they have supported the company in compiling the claim and a senior officer of the company must endorse the claim.
- Government is continuing to review abuse and compliance of the UK R&D tax schemes and considering additional measures. Plans to create a new crosscut team to monitor and deal with abuse are in motion. Increased trained resource have and will be deployed to processing teams.
Other points to note
- The eligibility of R&D undertaken by a foreign branch of a UK company under the proposed changes is still under review.
- The effect on SME Headcount in the European Commissions (EC) recommendation is still being considered with regards to whether furloughed staff should be included in the full-time equivalent (FTE) count.
- Patent box to be updated to include data and cloud costs
- New subsidy rules (that replace notified state aid because of Brexit) are still being discussed in relation to R&D tax claims.
- Attention focused on the Northern Ireland protocol which could result in further changes and implications.
It is and always will be positive to see additional funding and support going into funding programmes and R&D tax incentives for business, especially SMEs. At CTI I feel privileged to be able to be involved in this and assist companies Globally.
I believe there are multiple layers to the abuse identified by HMRC from no justification or evidence existing through to boundaries being pushed (if not surpassed) in ‘maximising’ claims. I am not convinced how the advanced notification will remove abuse; I do feel that it will remove the delay between a submission of a tax return with the R&D deduction and a technical report (which I imagine is messy from HMRCs side of things) but this doesn’t always reflect ineligible costs or activity being claimed for. As many of us R&D agents know there are still many eligible companies out there that for one reason, or another haven’t claimed and would in some cases not be able to make use of the full two-year window due to this advance notification rule. The other side to it is that companies default to notifying HMRC ‘just in case’ and if so, then how effective is the inclusion of such a process? Whilst the process doesn’t appear that it will be cumbersome this may have no relevance.
Moreover, expansions to the R&D definition and expenditure can be seen with consideration to new approaches and R&D projects taking place. I feel somewhat like a broken record, but it is still a ‘watch this space’ message to end, with changes in Government likely, a new Prime Minister and/or Government are likely to want to stamp their mark on this very generous and valuable incentive.
Our CTI International team, based in the UK, can answer any of your questions. Contact us today.