Significant changes to Research & Development tax rules from April 2023

Correct at the time of publishing (11th October 2022).

Draft legislation has been published which will affect companies that claim R&D tax relief under either the Research and Development Expenditure Credit (RDEC) or the small or medium enterprises (SME) R&D schemes.

The changes are intended to apply for accounting periods beginning on or after 1 April 2023.

Extension of relief

The definition of R&D will be extended to include R&D projects that are seeking advances in pure mathematics.

The scope of qualifying expenditure is also extended to include:

• the costs of licences to access and use a collection of data, and
• costs of cloud computing services including provision of access to, and maintenance of remote data storage, operating systems, software platform and hardware facilities.

These changes will particularly be welcomed by the technology sector and by those companies with R&D projects which incur significant costs associated with cloud computing and hosting.

Restriction to qualifying costs – subcontractors, externally provided workers (EPWs) and contributions to independent research (RDEC only)

The Government is seeking to focus on UK R&D activity, and therefore is restricting claims for expenditure on subcontractors, EPWs, and contributions to independent research bodies. To qualify such costs must be incurred in the UK or meet conditions for "qualifying overseas expenditure".

"Qualifying overseas expenditure" is restricted to costs incurred where the conditions necessary for the research are not present in the UK, such as geography, environment, or social conditions (for example deep ocean research) or where there are regulatory or other legal requirements for certain activities to take place in specific territories (such as clinical trials). The conditions will not include cost, or availability of workforce.

Similarly, contributions to independent research bodies will only qualify for R&D relief if the recipient is in the UK or meets the criteria for qualifying overseas expenditure.

Companies will want to consider the impact of these restrictions on future R&D claims particularly when deciding whether to engage with overseas subcontractors and externally provided to undertake qualifying R&D activities.

Format of claims

In future all R&D claims will have to be made digitally through the HMRC portal and be endorsed by a named senior officer of the company. Claims will also need to include details of any agent who has advised the company on compiling the claim.

Advance notification of claims

HMRC will require companies wishing to make an R&D claim to notify HMRC in advance, within 6 months of the end of the accounting period. Companies that have made an R&D claim in one of the preceding three accounting periods will not need to pre-notify HMRC.

This requirement will be particularly relevant to new claimants of R&D tax relief, who may not be aware that their R&D projects may qualify for a claim.

If you would like to discuss the changes in more detail, please contact Pete Edwards.