‘L’ Day – draft R&D legislation published

Today was an exciting day in the world of R&D as Government published the draft legislation and guidance setting out the changes planned next year. This will be effective for accounting periods starting on or after 1 April 2023 (so for a December year end, the 31 December 2024 R&D claim).

In a nutshell:

1. Subcontracted R&D and externally provided workers (and contributions to independent research) only qualify where R&D activities are undertaken in the UK. Narrow exemptions exist but are unlikely to apply to most companies.
2. As trailed, cloud computing and dataset costs will qualify (albeit with some restrictions).
3. New claimants must inform HMRC that a claim will be made within 6 months of the end of the accounting period. Following representations made by Bright R&D and others, this requirement has been paired back to apply only to new claimants and provide time after an accounting period finishes to make an informed decision.
4. More detail will be required at the point a claim is filed, acting as a disincentive to fraudulent claimants.

Further details follow for those interested (enjoy!). As always, please get in touch if you have any questions or would like to discuss further.

The detail

Tackling abuse and improving compliance

• New R&D claimants will need to inform HMRC that a claim will be made, within 6 months of the end of the relevant accounting period. If you have claimed within any of the last 3 years, this isn’t required. This essentially brings forward the deadline for new claimants to decide to make a claim by 18 months.
• Claims (filed digitally) must include a cost breakdown across qualifying categories (staff, materials etc.) and provide a brief description of the R&D. Each claim will need to be endorsed by a named senior officer of the company. Claims will need to include details of any agent who has advised the company on compiling the claim (rumour has it there could be a naughty list!).

Extending qualifying expenditure

• Qualifying costs will now include the costs of datasets and of cloud computing (with some caveats).
• Historically pure mathematics did not qualify however it will do going forward.

Refocusing the reliefs towards innovation in the UK 

• Subcontracted work and the cost of externally provided workers will be limited to UK activity only. 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). The exemptions will not include cost, or workforce availability.
• These restrictions do not affect patent box claims and the calculation of R&D fractions.

Previously announced measures to address anomalies and unforeseen consequences

Several changes will be made to correct anomalies and ensure the reliefs operate as intended. These include:

• amending the rule preventing relief for a company which is not a “going concern” so that where a company ceases to be going concern solely because of the transfer of a trade, and is otherwise viable, it may still claim
• allowing companies to claim RDEC instead where they had previously erroneously claimed SME relief and the time limit for amending claims has expired
• allowing companies to make or increase a claim for RDEC where HMRC makes certain types of assessment, as allowed by paragraphs 61 to 65 of Schedule 18 to Finance Act 1998
• clarifying that expenditure generally qualifies where a payment is made within two years of the end of the accounting period in which the expenditure was incurred
• amending the time limit for making a claim to two years from the end of the period of account to which they relate, rather than 12 months from the statutory filing date as defined by paragraph 14 of Schedule 18 to Finance Act 1998 — this will prevent companies which do not receive a notice to file, either because they fail to register or notify HMRC that they are dormant, from benefiting by having more time to make a claim
• supporting businesses growing and transitioning from the SME scheme to RDEC, by providing that where an SME within a group exceeds the size thresholds for an SME, all companies in the group will retain SME status for one year afterwards
• expanding the scope of rules in the Self Assessment legislation so that they (rather than common law) can be used to recover overpaid SME payable tax credit and RDEC to allow HMRC to recover such amounts where the taxpayer made a mistake despite taking reasonable care
• the new Health and Social Care Levy will also qualify for claims similarly to National Insurance contributions made by a company
• the Patent Box regime uses R&D definitions of qualifying expenditure as part of its calculations — as this package of R&D changes expands the categories of qualifying expenditure to include data and cloud computing costs, the relevant sections of the Patent Box rules require consequential amendment