The Institute of Chartered Accountants in England and Wales (ICAEW) has published its response to the proposed changes to Research and Development (R&D) tax relief, in which it makes a number of observations and recommendations.
In July 2022, HMRC published draft legislation to be included in Finance Bill 2022-23 which Reforms certain aspects of R&D relief. The draft legislation includes:
- The refocusing of relief for Subcontracted work and the cost of externally provided workers to UK activity, with some narrow exemptions for ‘qualifying overseas expenditure’.
- A need for companies to inform HMRC, in advance, of their intention to make an R&D claim.
- The requirement for additional information to be provided in relation to claims.
- A power for HMRC to remove R&D claims made ‘in error’.
In the ICAEW’s response to the draft legislation, they note and recommend that:
- The definition of ‘qualifying overseas expenditure’ makes reference to R&D undertaken outside the UK where it is ‘wholly unreasonable’ for the company to carry out those activities in the UK.
- The ‘wholly unreasonable’ test is subjective and may lead to greater uncertainty; an objective test should be used.
- A more expansive exemption from the restriction on non-UK activities should be introduced to encourage companies to carry out R&D work in the UK.
- Where a company has not previously made an R&D tax relief claim, or has not made a claim in the last three years, it must pre-notify HMRC of an intended claim within six months of the end of the accounting period to which the claim relates.
- Instead of a pre-notification, an authorised officer of the company should be required to certify the claim as a written statement enclosed with the claim.
- Alternatively, the time limit for the pre-notification should be changed to take account of long periods of account so as to not create an unduly short notification period. The time limit for notification should be linked to the period of account, rather than claim period.
- The additional information required in relation to claims has not been set out in the draft legislation and will be made by regulations.
- The legislation included in the next Finance Bill should include details of the additional information to be provided and the form and manner in which it is required. This will allow companies and HMRC to update their systems and processes in time for the change.
- It is not sufficiently clear under what circumstances a claim will be considered to have been made in error, such that HMRC can remove it.
- It is understood that the power is intended to remove claims from returns where a pre-notification has not been made, or the required information has not been provided, but this is not stated in the draft legislation. The legislation should be amended to make this clear.
Useful guides on this topic
Finance Act 2022: tax update and rolling planner 2022-23
This rolling planner tracks the key tax announcements that impact the 2022-23 tax year and beyond. This planner is updated on an on-going basis.
R&D Tax Relief: Overview
What is R&D Relief? How does it work? Why does the size of the company matter? What is sub-contracted R&D? How do I write an R&D Report?
R&D: SME Tax Credit scheme
What Research & Development (R&D) schemes are available for small and medium-sized companies undertaking R&D? How to make an R&D claim? What are the qualifying costs and how much can be claimed?
R&D: 'Large Company' Scheme (RDEC) Guide
What is the R&D Expenditure Credit (RDEC) Large Company Scheme for R&D relief? How does it work?
R&D: Staff costs, subcontractors & reimbursed expenses
What staff costs qualify for relief? Who are externally provided workers? Can you claim sub-contractor costs? Do reimbursed employee costs qualify?