Following the announcements made in the 2021 Budget, HM Treasury have published further details from its review into R&D tax reliefs.
At the Spring Budget 2021, HM Treasury launched its review of the two UK R&D tax relief schemes – the Research and Development Expenditure Credit (RDEC) and the small and medium enterprises (SME) R&D tax relief. As part of this, HMRC ran a consultation which received 183 responses to which Claritas Tax contributed.
In the Autumn Budget 2021, HM Treasury announced reforms to:
- support modern research methods by expanding qualifying expenditure to include data and cloud computing costs
- more effectively capture the spill over benefits of R&D funded by the reliefs through refocusing support towards innovation in the UK
- target abuse and improve compliance
HM Treasury’s report sets out further details of the proposed reforms in these areas and associated next steps. These cover the following areas: data/cloud costs; focusing on innovation in the UK; and administrative reforms. A summary of the reforms is as follows:
Data and cloud costs
The following new categories of expenditure will be brought into scope:
- licence payments for datasets; and
- cloud computing costs that can be attributed to computation, data processing and software.
HM Treasury says that this modernisation will ensure that the reliefs better incentivise cutting edge R&D methods which rely on vast quantities of data that are analysed and processed via the cloud. We agree with this.
Focusing on innovation in the UK
HM Treasury proposes to limit relief for payments to subcontractors, in both schemes, to claims where the subcontracted activities take place in the UK. The idea behind this is to help ensure that the spill overs from the research, such as improved skills, benefit the UK. Similarly, where companies claim for expenditure on externally provided workers (EPWs), these will in future be restricted to EPWs who are within UK PAYE/ NIC.
The restriction on where the subcontracted activity takes place is their initial proposal. HM Treasury has stated that it is interested in views from stakeholders on whether there is a case for any narrow exceptions to allow claims on some overseas activity, and submissions are invited about this by 8 February 2022.
Our view is that restricting subcontracted expenditure in R&D tax relief claims to activity carried out in the UK may not lead to HM Treasury’s desired outcome. The overall profitability of the business may be more important (influenced by the cost of instructing third parties) than the claim for R&D tax relief. Many companies may decide that altering the way that it operates in terms of its business model is not worth doing for the benefit that a claim for R&D tax relief may generate.
We will be providing our views about this restriction to HMRC before the 8 February deadline.
Administrative changes to improve how HMRC can target its compliance work
To protect the integrity of the reliefs, HM Treasury proposes that in future, companies should provide more information when making claims, that claims should all be made digitally and that the intention to claim must be notified in advance.
We welcome the desire to improve the integrity of R&D tax relief claims and fully support the HM Treasury`s proposed changes regarding compliance. We have already provided several suggestions on the ways in which the R&D tax relief claims process can be improved and be made more efficient and robust in the initial consultation. Our hope was and still is that the claims process can be improved for everybody; particularly the corporate taxpayer that has invested in R&D activity and requires the tax benefit to be able to continue to innovate.
We will continue to provide our suggestions to HMRC before the deadline of 8 February 2022.
