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Last updated: 6 Dec 2021
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Key changes to the R&D scheme you need to be aware of

After many years of relatively modest changes to the UK R&D tax credits scheme, we are now in line for some significant modifications that are set to shake things up. R&D expert Iain Butler provides an overview of the updates that will likely impact your future claims.

On 30 November 2021, HMRC released a series of proposals focusing on three main areas: 

1. Liability - making businesses more responsible for the claims they are submitting.
2. Location - limiting the scope of the scheme to be UK focused.
3. Opportunity - offering increased opportunities to access the scheme or include additional costs.

About the author

Iain Butler

+44 (0)20 7556 1343
butleri@buzzacott.co.uk
LinkedIn

On 30 November 2021, HMRC released a series of proposals focusing on three main areas: 

1. Liability - making businesses more responsible for the claims they are submitting.
2. Location - limiting the scope of the scheme to be UK focused.
3. Opportunity - offering increased opportunities to access the scheme or include additional costs.

Liability

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. 

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 proposing that businesses should provide advance notification that a claim will be submitted. In addition, there is a proposal to essentially place the requirement for a claim report into the legislation. 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

Location

The most disappointing aspect of the proposed changes is the effective ban on claiming overseas costs. It is 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. 

We will await details of any exceptions that may apply but this is a major reduction in the scope of support provided by the government. 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

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 cloud computing 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. However, HMRC are still looking to apply restrictions around rental costs and data or software acquired to be used in the final product. These restrictions are likely to be complex to apply and we can help you understand which costs might attract R&D tax credits.  

There are some other changes that will have a positive impact in specific situations. We have had a situation where a business within an SME group becoming large could cause the other businesses to instantly lose their SME status. This had led to many mistakes. Going forward, the year of grace that applies to growing businesses will translate across across the group.

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. But the new wording will allow businesses to claim for costs incurred in any accounting as long as these costs are paid for within two years. 

Find out more

To find out more about the key changes to the R&D scheme, join us on Wednesday 23 March 2022 as we cover in depth:

  • The changes to the R&D scheme to make it UK only
  • How this could impact your current business operations 
  • How your business can adjust going forward to mitigate the impact of losing financial support for overseas development costs.

Book your place here.

Final Thoughts

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.

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