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At Spring Budget 2021, the Government launched a review of the two R&D tax relief schemes – the Research and Development Expenditure Credit and the small and medium enterprises (SME) R&D relief. The objectives of the review were to ensure that the UK remains a competitive location for cutting edge research, that the reliefs continue to be fit for purpose and that taxpayer money is effectively targeted.
Alongside this, the Government published a consultation, which ran from 3 March 2021 to 2 June 2021, which explored the nature of private-sector R&D investment in the UK, how that is supported or otherwise impacted by the R&D relief schemes, and where changes may be appropriate. We responded in detail to the consultation after which at the end of last year, the Government published it’s R&D Tax Reliefs Report outlining the key changes it proposes to make, and inviting further responses by 8 February 2022.
As the largest player in the R&D tax relief market, we are committed to engaging with the Government on its review and have made our views, informed by over a decade of working with tens of thousands of businesses across the UK, clear through our responses to the consultation and now the Report.
The Report elaborates on the Government’s announcements at Autumn Budget 2021 that it will reform R&D tax reliefs to:
We welcome the Government’s decision to target abuse and improve compliance across the industry. We remain deeply concerned at the number of businesses in and continuing to enter the market that do not have the expertise and appropriate frameworks in place to ensure compliance with the relevant regulatory and practice standards, placing their clients’ businesses at risk. We are generally supportive of the proposals made to benefit this area, but have raised a number of questions about how the current proposals will work in practice.
In respect of the Government’s proposal to require companies to inform HMRC in advance that they plan to make a claim for relief, we are very concerned that this proposal could unfairly prejudice SMEs and lead to an increased administrative burden on businesses.
We have recommended that the Government take robust action to curb abuse, including the formal regulation of agents and advisers. If the Government chooses not to take this option, our position is that they should at least ensure a Code of Conduct is published for representatives to ascribe to in order to ensure that the right people (i.e. unscrupulous advisers, rather than SMEs) are targeted, and empower companies to choose a compliant adviser.
We welcome the decision to expand qualifying expenditure to include data and cloud costs, which are often substantial for companies undertaking R&D. We have asked questions around the technical detail, including around apportionment, and have asked for guidance to be published to assist with the application of the new rules.
We have asked the Government to reconsider its decision to refocus support towards innovation in the UK by only allowing relief for expenditure on third party contractors performing work in the UK, and on externally provided workers where those workers are paid through a UK payroll. This does not fit with “Global Britain” and it seems overly restrictive for business done with overseas companies for commercial reasons. We have made clear that, if this proposal is adopted, exceptions should apply (e.g. where it would not have been possible for the work to be carried out in the UK).
We look forward to continuing to engage with the review, including reviewing the draft legislation relating to the proposed changes due to be published in draft in summer 2022 before the final legislation takes effect from April 2023.
Emily McCarthy – Director of Tax Advisory