R&D tax reform - the devil in the detail has arrived

01 December 2021

HM Treasury has published its R&D report, providing more detail on the R&D reforms outlined in Autumn Budget 2021. These are summarised below and will come into effect from 1 April 2023.

Non-UK Costs

As expected, R&D qualifying expenditure will be refocused on domestic expenditure through the prohibition of:

  • Overseas subcontractor costs, (including contributions for independent R&D of an overseas qualifying body); and
  • Overseas externally provided workers.

In very limited circumstances ‘overseas’ expenses will still be allowed to count as “UK R&D costs” – for example, payments to overseas volunteers in clinical trials and consumables sourced overseas. In addition, HMT has left the door open for further very specific exemptions from the ban on overseas costs and no doubt there will be much lobbying on this issue as the consultation on the new rules continues.

Data and cloud computing

The qualifying cost categories will, as previously mooted, be expanded to include:

  • Licence payments for datasets where the costs are incurred solely for a qualifying R&D project and where the data is not available for subsequent reuse or resale; and
  • Cloud computing costs that can be attributed to computation, data processing, analytics and software. Costs in relation to servers or storage will not qualify.

Abuse and compliance

The report sets out that to counter perceived abuse of the R&D regime by ‘advisers, many with no background in tax, … [who] submit numerous dubious claims’, the Government intends making the following compliance changes:

  • All claims for R&D reliefs will have to be made digitally (except from those companies exempt from the requirement to deliver a Company Tax Return online)
  • It will become mandatory to include more specific details in claims, e.g. what expenditure the claim covers, the nature of the advance sought, the field of science or technology, the uncertainties overcome
  • The R&D claim will need to be endorsed by a named senior officer of the claimant company
  • Companies will need to inform HMRC, in advance, that they plan to make a claim, and
  • R&D claims will need to include details of any agent who has advised the company on compiling the claim.

These are far reaching measures, designed to tackle the root abuse of the R&D regime, however, the government hopes that it will have a limited impacted on compliant businesses. It is certainly true that most of these requirements are already met or exceeded by reputable firms: all R&D claims supported by BDO are accompanied by a detailed report explaining the technical background, methodologies used and detailed explanations of calculations.

The proposals are clearly designed to deter speculative claims but there are undoubtedly practical and technological hurdles to overcome here. Indeed as HMRC abandoned the previous attempt at a R&D technical project description portal, some R&D by HMRC will be required to implement this solution!

It is easy to see why HMRC might like the idea of potential claimants notifying HMRC in advance that a claim will be submitted, as it will allow them to focus their resources on scrutinising claims. We expect this to facilitate intelligence-led enquiry work, where HMRC use data analytics to identify potentially erroneous claims. HMRC has already dedicated additional resource into R&D enquiries and sending out ‘nudge’ letters where data looks inaccurate. Anyone with concerns about an incorrect R&D claim should seek expert advice regarding voluntary disclosure to HMRC.

Unfortunately, in our experience, there are many situations where advance notification is likely to be impractical and, if implemented very strictly, this may bar many companies making their first steps into R&D from making a claim. Hopefully, ongoing consultation will help the right balance to be struck here.

Next steps

Many of the challenges faced by businesses will be how to make the changes work in practice. HMT recognises this and has requested feedback by 8 February 2022.

We will be submitting a response and would welcome the opportunity to discuss the practical implications of the reforms with you. Please contact Carrie Rutland.