There have been many recent changes to the taxation of Research & Development (R&D). Tax Partner, Catherine Heyes, summarises what you need to know now.
Has your Research & Development ground to a halt?
In June, HMRC confirmed that they were looking to investigate R&D claims which appeared ‘irregular’. Although they did not define the criteria under which they would be reviewing such claims, it is safe to say that the majority should remain unaffected. What is does mean though is that there is a delay in the usual processing time of R&D refunds.
In the current economic climate, this is not ideal news. So, what can you do to ensure that this impacts your claim as little as possible?:
Submit your claims as soon as practical, to reduce any potential cash flow issues
Ensure that your claim is supported with a robust report to substantiate it
Ensure that the company tax return (CT600) is completed correctly.
Whilst delays can be frustrating, HMRC has asked for claims not to be chased via the R&D helpline/mailbox. Instead, the company’s online account should be used to check the status of a claim.
Changes to Qualifying Expenditure
Following earlier consultation, there has been a shift to try and modernise the relief and better incentivise cutting edge R&D methods which rely on vast quantities of data that are analysed and processed:
Dataset licence payments
Datasets are an essential R&D tool for many companies. Expenditure via licence payments on purchasing datasets which are used directly for R&D in a qualifying R&D project will qualify for relief from April 2023.
Companies will not be able to claim relief for the cost of datasets that can be re-sold or have a lasting value to the business beyond the duration of the project. This means that relief can only be claimed for costs incurred solely for R&D and not for costs that can be reimbursed. In addition, an end-user access agreement or licence agreement will not qualify if it grants:
any rights of resale
any right to publish, share or communicate the raw data
any ongoing rights of use.
Cloud computing costs
From April 2023, costs for cloud computing services will also constitute qualifying expenditure. These include costs which can be attributed to computation, data processing, analytics and software.
Not all the costs that are commonly included in a cloud computing package may qualify, however; for example if they relate to general overheads in respect of servers and data storage. Under the existing scheme, relief is not available for general overheads (such as rental costs) and it is intended to exclude similar costs incurred as part of a cloud computing package.
Despite these welcome extensions of the rules, there will also be a refocus of the relief towards UK innovation Therefore, costs of overseas workers will not be allowed from next year.
There may be some situations where overseas work cannot be avoided, and we wait to see whether HMRC will allow for this in its final guidance. We anticipate some exemptions where it is not practical to carry out work in the UK, for example for environmental/geographical, legal or regulatory reasons.
If you think that the above changes are going to affect your claim, for better or worse, the impact on your cash flow should be quantified. Get in touch with your usual PKF contact or our team of R&D specialists to advise you, and don’t leave your claim to the last minute.
If you would like advice on any of the issues raised in this article, please contact Catherine Heyes.
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