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Devils in the detail

HMRC has published draft guidance ahead of the implementation of reforms to research and development (R&D) tax relief later this year. As is often the case, it pays to read the small print, which is why our Associate Member has flagged up five points to keep in mind come April…

The reforms to R&D tax relief that come into effect on 1 April 2023 include things like bringing pure mathematics research within the scope of relief and including data and cloud computing as qualifying costs.

Other changes include restricting expenditure on some overseas R&D activities and a package of measures to target abuse and improve compliance.

HMRC’s draft guidance seeks to clarify some technical aspects of how the reforms will work in practice – so here’s five things to flag up before the final legislation is taken forward in the Spring Finance Bill.

‘Wholly unreasonable’ overseas R&D

The first section of the guidance sets out what will qualify as UK expenditure and qualifying overseas expenditure (QOE) in future. Three factors must apply for an activity to be QOE:

  • That conditions necessary for the R&D are not present in the UK

  • That the conditions are present in the location where the R&D is undertaken

  • That it would be wholly unreasonable to replicate the conditions in the UK.

The guidance explores in more detail what might constitute ‘wholly unreasonable’ with the use of some interesting examples. One scenario would be where there is a relevant testing facility in the UK, but capacity isn’t available in the timeframe required so the company chooses to test overseas.

This example is extended later to explain one of the excluded factors (cost): if time pressures mean that R&D cannot wait until a new facility is developed in the UK, the theoretical possibility that – at great cost – the facility might be developed to enable activity to take place in the UK, will not prevent the expenditure being QOE.

But the first of our draft guidance ‘devils’ is to be found in the discussion of externally provided workers (EPWs).

It is not just overseas EPWs who may be caught and excluded when this legislation is introduced. Whether UK or overseas, companies will first need to check whether the amounts to be included for each EPW are subject to UK PAYE and NIC.

If not, the EPW expenditure may still qualify if the amount is QOE, as determined by the ‘wholly unreasonable’ test outlined above.

For unconnected EPWs, in the case of a UK-based EPW operating via a personal service company and extracting funds by way of dividend rather than a PAYE salary, it is likely that expenditure would be excluded.

Claim notifications for repeat claimants

The section of the draft guidance tackling claim notification includes examples to show when this new requirement will apply. This turns up something new as the guidance refers to calendar years, not accounting periods as many may have assumed. This makes the actual filing dates of R&D tax claims very important for determining whether a notification is required, rather than simply the financial year to which it applies.

Another notable detail on notification is confirmation that, if an R&D claim is submitted for a period before the notification date, no separate notification will be required, i.e. if a company files their claim within six months of their year-end, they don’t need to notify.

Beware additional information overload

Additional information required because of the changes will be submitted via a form to be made available on from April 2023.

But in advance of unveiling the form itself, the guidance includes a lengthy list of information fields which will need to be filled out.

The list includes a separate figure for qualifying indirect activities (QIAs), stipulations on the number of case studies required based on a sliding scale of projects and total expenditure covered, and PAYE scheme references for EPWs.

Don’t let your judgement be clouded

The guidance confirms that for accounting periods starting on or after 1 April 2023, data licence and cloud computing services costs can be qualifying expenditure when employed in activities which directly contribute to the resolution of scientific or technological uncertainty. There are some useful examples of when the general exclusions for reselling and/or publishing data would not apply.

“HMRC’s draft guidance seeks to clarify some technical aspects of how the reforms will work in practice”

On data licences, the guidance clarifies that data that has been gathered by a business – rather than licenced – is not qualifying expenditure. However, it is worth remembering that the staff costs of gathering the data are likely to qualify under the staff costs category.

Deletion power is hidden devil

Even worse than the devil in the detail is the devil that is nowhere to be found in the guidance – in this case, the absence of any reference to HMRC’s new deletion powers.

These were included in the draft legislation published on ‘L-day’ last summer and give HMRC the power to remove R&D claims made in error. This falls outside the existing enquiry process, leaving companies with no recourse or right of appeal. More detail is still required here, including examples of when and how this power will be exercised.


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