The proposed changes, set to come into force between 2022 and 2023, seek not only to reduce the potential for error and fraud in R&D claims but also to ensure the UK remains at the forefront of scientific and technological innovation.

While specific emphasis has been placed on cloud computing costs (particularly relevant to companies whose projects involve software development and the use of ‘big data’), some of the broader changes will interest any company currently claiming (or yet to claim) tax credits.

With that in mind, let’s look at what might change and how it could impact businesses.

New legislation to acknowledge data and cloud computing

One of the most exciting announcements from the Autumn Budget is that qualifying expenditure for both the Research and Development Expenditure Credit (RDEC) and SME R&D relief schemes will be expanded to include cloud computing and big data costs.

There had previously been uncertainty around exactly what type of spending would be eligible, but HMRC has now clarified that some indirect uses of cloud computing, such as cloud storage, will have the potential to be included in the change.

Legislation in this area hasn’t been updated in a long time, so this will be good news for many businesses – particularly those that might not be rooted in software technology and big data, but still use it for R&D purposes.

Pure mathematical advances

HMRC’s definition of R&D has, till now, made it clear that mathematical advances in and of themselves are not R&D for tax purposes (unless they can demonstrably represent ‘the nature and behaviour of the material and physical universe’). But this is being amended. Pure mathematical advances, likely linked to those with machine learning and big data will soon have the potential to qualify (though we’ve yet to see any drafts of the supporting legislation). This amendment comes after 20 years of firmly excluding such projects from its legislation.

This is big news for companies working in fields like artificial intelligence (AI) and robotics, who should now be able to fund innovation that in turn bolsters the UK’s reputation in this domain of science and technology.

Amendments to restrictions on overseas subcontractors

In its November report, the government laid out plans to “refocus relief towards innovation in the UK” by stopping businesses from claiming tax credits on the costs of R&D activities conducted overseas.

The overarching goal of all these changes is to ensure the right businesses can access the right funding, so don’t be afraid to ask your accountant or advisor any questions when you need more information.

It has now changed its decision and said in the Spring Statement that it now recognises there are some cases where it’s necessary for businesses to outsource work to other countries.

Now, according to the new documentation, expenditure on overseas R&D work will still qualify where there are:

  • material factors such as geography, environment, population or other conditions that are not present in the UK and are required for the research – for example, deep-ocean research
  • regulatory or other legal requirements that activities must take place outside of the UK – for example, clinical trials

This means UK companies can still access the best talent in their fields, regardless of location, without losing out on tax relief.

Kene Partners witnessed another type of scenario recently where this ruling is relevant. A client in the food & beverage sector needed to replicate a certain set of humidity and temperature conditions for production purposes, so took its machinery overseas for testing.

Under the changes proposed in November, the costs of this wouldn’t have been eligible for R&D relief, so the rethink is valuable here.

New admin processes aimed at streamlining the claiming process

Several administrative changes are also taking place, with the aim of refining the application and handling processes, combatting errors and minimising fraud.

Firstly, any company making a claim will require a senior officer (usually a board member, but generally anyone with senior responsibilities) to endorse its application. This is unlikely to increase the administrative burden on applicants but should raise awareness among claimant businesses’ directors and help to reduce fraud.

It’s also likely to become mandatory for businesses to provide supporting information alongside any R&D claim (something we as specialist advisors do already), and to inform HMRC of their intention to make an R&D claim during the course of the financial year.

Lastly, all R&D relief claims will need to be made digitally, which makes sense given the ongoing Making Tax Digital initiative and, like the other changes, should help to streamline the claiming process (meaning businesses benefit sooner) and reduce application errors.

A final word of advice

Tax credits are a form of self-assessment so however, you’re accessing them, whether it’s independently through your accountant or with an advisor, it’s important to stay up to date with the legislation.

That means that while some of these updates had been discussed already, you should read the latest statement in full to ensure you’re refreshed and prepared for what’s to come.

Some of the changes we’ve seen from HMRC point to a subtle but significant shift from R&D claims being a retrospective action to being more of a contemporaneous procedure. This could impact how you keep records, so now’s the time to adjust the appropriate processes where necessary.

The overarching goal of all these changes is to ensure the right businesses can access the right funding, so don’t be afraid to ask your accountant or advisor any questions when you need more information.

We’re here to help

Should you need more support on your next claim, or if you just want to know more about how you can benefit from R&D tax relief, Kene Partners’ experts can help. Book a free consultation today.

You can also learn more about this topic by watching our recent round-table discussion.

HMRC has proposed a number of changes to the way R&D claims are calculated, submitted, and processed. As the administrating body of the government’s R&D tax credits, HMRC wants to make sure that the incentives acknowledge and accommodate current forms of innovation and trends in UK science and technology.