The impact of changes to R&D tax legislation on R&D tax credit claims
There were a number of changes announced in the Spring Budget in March that affected R&D Tax Relief. The question is, what are they and how can you prepare for them?
In what areas can I make a claim?
Eligible Expenditure Changes
The overseas activity of the company
HMRC announced that all subcontractor costs must be incurred in the UK to align the UK's R&D Tax Relief scheme with international standards. There is one exception to this rule: Qualifying Overseas Expenditure (QOE). A new accounting period will begin on or after 1 April 2024 under this new legislation.
Subcontractor costs must be incurred in the UK, consumables must be purchased in the UK, and any software, data, and cloud services must be provided in the UK. The PAYE and NICs must also be paid by Externally Provided Workers (EPWs).
It is only possible to claim QOE for R&D activities that cannot be completed in the UK, achieved elsewhere, or that cannot be reasonably replicated in the UK. In most cases, QOE is determined by geographic, environmental, and social conditions. A research project that examines specific geographical phenomena that do not occur in the UK is eligible, for example. QOE can also be claimed if a company does not have access to certain equipment or does not have enough patients to run a clinical trial in the UK.
Consider your current costs and how you can adjust them before the changes take place to mitigate this new challenge. The next few months are ideal for tagging and splitting out any overseas R&D costs.
These changes will become effective for claims filed on or after April 2024. As a result, companies relying on overseas activity for a substantial portion of their R&D claims will have time to assess the impact and, if needed, adjust their UK-based activities.
If these changes affect your claim, you might be interested in finding out how to mitigate their impact. You can rely on Zyla Accountants to review your data and determine the best methods for maximising your eligible expenditures for any past, current, or future R&D activities.
Costs associated with cloud computing and data storage
Overseas expenditures are being cut, but software costs are rising, which is likely to benefit many software companies. Expenditures related to data licenses and cloud computing that directly contribute to R&D will be allowable. For accounting periods beginning after 1 April 2023, this change will take effect.
The apportionment method HMRC expects to be used for these costs should be fair and appropriate. Before this measure takes effect, you may want to establish which fair method is easiest to use based on the information you have and which is most beneficial to your claim. For instance, fair and reasonable methods include allocating staff hours, using licenses, or comparing R&D data with non-R&D data.
Pure Mathematics
Before, advances in pure mathematics were subject to grey areas in the law. The legislation will become much more black and white in the future; genuine advances in pure mathematics will be eligible starting on or after 1 April 2023.
In cases where you have not tracked this activity previously, you may wish to consider it when collecting data for your R&D tax relief claim.
Apart from these changes, the same cost categories apply as before.
What is the process for making a claim?
A number of important changes have been made to the R&D tax credit claim process
The pre-notification process
Some companies will need to submit a Claim Notification form before making a claim for accounting periods starting after 1 April 2023.
You must notify HMRC within six months of the end of the accounting period that you intend to claim for if you're a first-time claimant or you have not made claims for the past three years.
Due to the fact that HMRC does not accept late claim notifications, claimants need to prepare much earlier. After the accounting period ends, claimants will still have two years to submit their claims.
Claimants will need to prepare the following information, which includes selecting a research and development advisor.
Unique Tax Reference (UTR)
A company's main contact for internal R&D
R&D claim agent contact information
Tax relief period start and end dates
The period of account start and end date
An overview of the high-level activities planned
Form for Additional Information
For all R&D tax credit claims after 8 August 2023, the Additional Information Form (AIF) is required. With this change, claimants must justify their claim's validity under HMRC's Guidelines. Detailed information about the company, your contact information, and qualifying expenditures must be included.
Technical justifications for R&D activities vary according to the number of projects you are claiming. In your essay, you need to explain what your advancement is, in what field, the baseline of science and technology, the uncertainties you faced, and how you overcame them. A breakdown of the costs across the projects that you wrote up must accompany your technical justification.
Prepare for this by collecting as much data as possible and keeping track of the stages of R&D at regular milestones during the development process. When your projects started, what the R&D goals of each project were, the uncertainties you faced, and what work you did during the period will simplify this process. To ensure your claim is not only valid, but optimised, all R&D staff will need to cooperate. Additionally, we recommend categorizing your R&D costs by direct and indirect activities.
Wrapping Up
A major goal of the latest batch of changes is to bring the UK's R&D tax credit scheme in line with international standards. It will be necessary for companies to prepare much earlier and to take further responsibility for ensuring the claim is valid and fair; that's without considering the chances of maximising your claim.
Speak to Zyla Accountants today for support with your claim, we have a number of case study's on our website too.