On the 20th of July – otherwise known as Legislation Day (L-Day), the UK government published draft legislation for the forthcoming Finance Bill 22/23, the vehicle for renewing annual taxes, delivering new tax proposals and maintaining administration of the tax system.
Within this draft measure are changes to the Research and Development (R&D) tax relief regime which aim to:
- Support modern research methods by expanding qualifying expenditure to include data and cloud cost;
- More effectively capture the benefits of R&D funded by the reliefs through refocusing support towards research and development activity that arises in the UK;
- Target abuse and improve compliance by requiring claimants to submit a pre-notification of their claim and the provision of additional information;
- Make amends to address unintended consequences in the existing legislation.
R&D relies on modern technology and the fact that the legislation will be updated to reflect the different ways in which cutting edge research and development is now undertaken is a much overdue move in the positive direction. Cloud computing, licence payments for datasets and data analytics are all considerable costs for businesses, and the changes will allow them to claim relief on a bigger pot of expenditure from April 2023.
Whilst we wholeheartedly welcome the government’s focus on preventing abuse and targeting compliance, we are nevertheless deeply concerned by the concrete proposed measures. These changes, as proposed, risk hindering SMEs which are the backbone of economic growth in the UK and who should be able to benefit from a scheme fit for purpose to foster innovation.
Advance notification of intent to claim
From April 2023, companies will be required to inform HMRC, in advance, that they plan to make a claim. They will need to do this, using a digital service, within 6 months of the end of the period to which the claim relates (companies that have claimed in one of the preceding three periods will be exempt from the requirement to pre-notify).
The government’s new approach unfairly penalises SMEs by adding needless restrictions for first-time R&D tax credit claimants. This change effectively artificially brings forward the deadline for making a claim, restricting SMEs’ window to apply for essential tax relief.
This is a huge concern. From our vast experience of engaging with small and medium-sized businesses across the UK, we know that R&D tax reliefs are still not widely understood and there is now a real risk that SMEs conducting R&D can miss out on the credits they are entitled to because they might not realise they are eligible for relief until it is too late.
At Leyton, we strongly agree that reform is needed to impose compliance to prevent misuse of the R&D Expenditure Credit (RDEC) and the small and medium enterprises (SME) R&D relief. However, instead of reducing abusive claims, the draft legislation is more likely to prevent SMEs who are conducting genuine R&D from claiming tax relief. This is not only a massive setback for any SMEs who might miss out, but it’s also counterproductive to the government’s strategy to boost productivity and economic growth in the UK.
We have, on a number of previous occasions, suggested that a more sensible approach would be to enforce formal regulatory requirements or create a more informal code of conduct, such as the existing Professional Conduct in Relation to Taxation (PCRT) for providers.
Exclusions for overseas subcontracted work and the cost of externally provided workers
It is disappointing to see that the draft legislation provides, as previously suggested by the government, that expenditure for overseas subcontracting and Externally Provided Workers (EPWs) not paid through UK payroll are set to be excluded, bar certain very narrow exceptions. Such costs are an integral part of a UK company’s R&D process.
The denial of relief for overseas subcontracting costs does not feed into the government’s strategy for a ‘Global Britain’. Limiting incentives for international cooperation could risk making UK SME’s less competitive and compromise our international reputation. The changes are overly restrictive for work done with international businesses for commercial reasons, or even practical reasons where it might not be possible to conduct the work in the UK due to lack of facilities, expertise, equipment, or a combination thereof.
What’s next?
As now customary, the government has made the draft legislation available for technical consultation prior to the relevant Finance Bill being laid before Parliament and will accept comments on the published draft by 14th September.
It is clear that in the eve of the final legislation, the need to raise awareness of the scheme, particularly for SMEs who may be first-time claimants, is now more pressing than ever. As such, we will provide detailed guidance to our clients and prospective companies seeking to claim R&D tax relief.
As a partner for growth to our clients and the largest representative of SME claimants in the UK market, we also remain committed to engaging with the government by raising our concerns before the final legislation comes into effect from April 2023.
If your business has a query about how the proposed changes will affect the R&D Expenditure Credit or SME R&D Tax Relief, please get in touch.
e marketinguk@leyton.com
t +44 20 7043 2300
