Key changes to the R&D scheme you need to be aware of

Liability

Businesses have seen relatively little challenge to their R&D submissions over recent years as HMRC has struggled to keep up as the number of claims have ballooned. Unfortunately, this has encouraged some businesses to develop a cavalier approach to their claims that has pushed the boundaries of what is claimable. This has not gone unnoticed by HMRC. 

One of the key updates HMRC is proposing will insist that someone in the claimant company must endorse each claim. In many cases, this will formalise the existing process. But for businesses that delegate the claim preparation to an advisor, or potentially do not even see the claim as submitted by their advisor, this means someone in the senior leadership team will have to thoroughly understand what has been claimed and why. It may seem like a daunting prospect to get to grips with the extensive legislation and HMRC guidance to sign-off on the submission. Unlike many advisers, we work with you by upskilling your internal team to understand what you are claiming for and submitting, providing you with increased security if HMRC were to challenge.

HMRC is also expecting claimant businesses to provide advance notification that a claim will be submitted no later than six months after the end of the accounting period. This will limit the scope for retrospective claims and companies will need to keep on top of potentially eligible projects to ensure they notify HMRC in time and do not lose out on any benefit. In addition to this notification, HMRC is putting in place the legislation to define  requirements for submission documentation, including the need for a a claim report to be provided every year a claim is submitted. These changes will allow HMRC to specify the level of information required to support any claim and to understand where new claims may arise. 

I believe this means that the days of submitting a claim with minimal information will be in the past and businesses need to be prepared to create an annual claim report. HMRC has specified what it expects to see in terms of technical documentation, setting out the advances and uncertainties. Going forward, claims will not be paid out unless this information is provided by the claimant company. We can highlight any reporting issues by undertaking a claim health check.

Location

The most disappointing aspect of the proposed changes is the effective ban on claiming overseas costs. It’s understandable why the UK government is concerned about the scheme subsidising overseas development teams but, in my view, this change will disproportionately hit SME businesses. 

Many smaller businesses in sectors where there are resource limitations will find themselves priced out of the market for UK employees and will now lose R&D tax credits support as well. But worse still, I know start-ups working on innovative technologies who simply cannot find the skills in the UK to support their development, and they need to collaborate with overseas scientists to develop a viable product. I fear this change will drive businesses to consider moving to be co-located with the key talent or making certain sub-sectors unviable for UK start-ups. 

The proposed exemptions highlighted by HMRC are very restrictive and are quite ambiguous in their nature or scope of applicability. But more concerning is that the range of changes being proposed for the externally provided worker category seem excessive and may have an unintended spill-over impact on claiming for UK based contractors as well. The wording in the draft legislation may limit the ability of businesses to quickly adjust to the overseas rules and we feel they need to be revisited to ensure the smooth operation of the UK scheme. But for those businesses who want to be a success in the UK, now is the time to start reflecting these changes into future business plans, and we can help by providing an R&D strategy overview to see how worldwide incentives may support these plans.

Opportunity

Let’s now move onto the good news within HMRC’s proposals. After many years of debate, we finally have confirmation that data and hosting costs will be claimable. These costs are now becoming an overhead of undertaking R&D in many sectors, and I feel this is a very positive step to expand the scheme. The draft legislation shows that some restrictions will apply but this is a major improvement to the scheme, given that hosting and cloud computing can be a large cost for many business.

The final change that is worth noting is that HMRC will seek to address an anomaly that arose out of a tribunal case in 2016. During the tribunal, it was highlighted that as per the wording of the legislation, certain costs need to be paid for before the end of the accounting in which they were being claimed. HMRC has been pragmatic and allowed businesses to claim if the costs have been paid before the claim is submitted. The draft legislation has been worded in such as way that HMRC will allow businesses to claim for costs incurred in an accounting period as long as these costs are paid.

Final thoughts

Now we have HMRC’s proposals for the future direction of the R&D tax credits scheme, it is clear businesses need to prepare as times are changing. I have highlighted some of the key changes and they will need planning and preparation to be ready for April 2023 when these changes will start. Our dedicated R&D team can help you plan how to adjust for the proposed changes and can offer a free claim health check to identify issues. To find out more, please fill in your details below and me or a member of my team will be in touch.