BPF Member Alert – How does the new R&D legislation impact your R&D claims?

As you may already be aware, the Government has published new draft legislation regarding various changes within the R&D Tax legislation which were first consulted on back in Autumn 2021. The new R&D legislation introduces several significant changes that come into effect from April 2023.

Most of the changes are progressive, in line with our expectations and reflect a regime fit to incentivise modern R&D practices. The main exception is a renewed focus on UK innovation only, which introduces new measures carving out the majority of overseas R&D activity.

We have set out below a summary of the changes that will take effect from April 2023:

• Cloud computing and data costs

As of 1st April 2023, cloud computing costs and dataset costs may be claimed as part of R&D qualifying expenditure. This will benefit many of the BPF members who incur significant  amounts of cloud computing and data costs in the course of R&D projects, and is a welcome departure from HMRC’s historic view that costs of this nature are ineligible.

Secondary legislation will also be introduced to extend, with effect from April 2023, the scope of R&D relief to cover mathematical advances. This will help to widen the scope of qualifying R&D projects in sectors including AI, algorithmic development, and computing.

• Exclusion of overseas R&D activity

For BPF members that are considering or are already undertaking overseas projects, there will be limits on overseas expenditure on subcontracted R&D and externally provided workers. There will be some narrow exemptions where factors such as geography, environment, population or other conditions that are not present in the UK are required for research (for example, deep ocean research) and where there are regulatory or other legal requirements for certain activities to take place in specific territories (for example, clinical trials). However, lower costs or availability of workers have been specifically identified as unallowable.

These changes aim to focus the reliefs more effectively on UK expenditure and provide better targeted support for innovation in the UK with a view to increasing international competitiveness.

• Increased project information requirements

Whilst HMRC have always been clear that well-articulated R&D reports can lead to minimised compliance checks, the changes clarify what they will require from April 2023. HMRC will require detailed reports of the R&D work undertaken, a detailed breakdown of qualifying costs, the claim to be endorsed by a named senior officer of the company and the detail of any advisor who has advised on the claim. This is a welcomed standardisation which should enhance compliance with the incentives across industries.  

New claimants, and claimants who have not made a claim in the last three accounting periods, will be required to submit a pre-notification of their claim within six months after the end of the accounting period to which the R&D claim relates.

• Consequential measures on Patent Box

The Patent Box regime uses the R&D definitions of qualifying expenditure as part of its calculations and therefore the rules need to be amended to reflect the expansion of the categories of qualifying expenditure to include data and cloud computing costs.

If you have any questions on the new draft legislation and how this may affect your future R&D claims, please reach out to James Edgar or Amy Fitzgerald of EY who will be happy to setup a discussion.

Contact

James Edgar 
Innovation Incentives ( Markets and Development ) 
Ernst & Young LLP
E: [email protected]
Mobile: +44 07947 750530 
www.ey.com