HMRC is inviting people to comment on draft guidance relating to the upcoming R&D tax credit relief reforms.
The reforms, expected to be implemented from 1 April 2023, will change how R&D works in practice and will also set out additional information requirements when applying for the relief.
Anyone wishing to comment can do so until 28 February via the Government website.
Initially announced in the 2021 Budget, the Government set out plans to review the R&D system to ensure that the UK remained a competitive location for research. Another aim of the review was to guarantee that the reliefs continue to be fit for purpose.
Major reforms to R&D
One of the main focuses of the R&D reforms is on qualifying expenditure in the UK and overseas.
For accounting periods beginning on or after 1 April 2023, for both the SME R&D and R&D expenditure credit (RDEC), expenditure on payments to subcontractors must be either UK-based or meet the overseas qualifying criteria.
The guidance details that qualifying overseas expenditure (QOE) must only be considered if companies cannot possibly carry out the work in the UK.
Any companies wishing to claim R&D on overseas expenditure must ensure that the following three factors apply:
- the conditions necessary for the R&D are not present in the UK
- the correct conditions are present in the location where the work is carried out
- it would be wholly unreasonable to replicate the conditions in the UK.
One example that HMRC gives is that, if the R&D involved placing sensors on an active volcano, the work would need to be carried out outside of the UK as it could not be replicated in the country.
There are also new reporting requirements, and first-time users of R&D relief will have to submit a claim notification form.
In order to apply, you will have to submit the following information:
- your unique tax reference (UTR) number - the same on your CT600
- contact details of the main R&D leader in the company
- contact details of any involved agent
- an agent reference number (if applicable)
- your period of account start and end dates
- your accounting period start and end dates for the period where you carried out the R&D work.
The draft legislation for these measures was published for comment on 20 July 2022, and any final legislation will be taken forward in the Finance Bill later this year.
R&D and the Autumn Statement
Alongside the reforms set to take place this year, Chancellor of the Exchequer Jeremy Hunt used his Autumn Statement in November 2022 to outline plans that will reduce the amount of R&D relief SMEs can claim.
In the Statement, Hunt announced the additional deduction for SME R&D relief would decrease from 130% to 86%, and the SME credit rate would drop from 14.5% to 10%.
The objective of this policy, which is due to come into effect as of April this year, is to combat fraudulent claims and abuse of the system.
Senga Prior, group chair of the Chartered Institute of Taxation and the Association of Taxation Technicians steering group, expressed concern over the changes saying it would be "harmful for the smallest and newest businesses".
Talk to us about your R&D tax credits.