Breaking News: UK R&D tax relief updates following Budget 2021

R&D tax relief is changing

Back in October, we promised to keep you updated on the government’s further tax administration and maintenance announcements that were due later in the Autumn (see the original article here).

The review of R&D tax relief specifically was unveiled as part of the Spring Budget 2021, with the government considering both the SME branch of the scheme and the Research and Development Expenditure Credit (RDEC). A consultation then ran for several months - it has now closed, having attracted 183 responses.

What is the point of the reforms?

To refresh your memory, the purpose behind these reforms is to:  

• Improve compliance and drastically reduce any opportunity for abuse of the scheme
• Take into account modern research methods, so that data and cloud costs are classed as eligible expenditure
• Refocus support towards UK innovation by keeping the ‘spillover’ benefits of R&D work within this country rather than abroad.

The government’s latest report sets out in more detail what the reforms are as well as what next steps to take.

There are three key areas the latest reforms cover:

• Data and cloud costs
• Innovation in the UK, so the UK benefits most
• Administrative reforms.

We’ve looked at these in more detail below.

Data and cloud costs

The following new types of expenditure can now be included in an R&D tax relief claim:

• Licence payments for datasets; and 
• Cloud computing costs that relate to computation, software and data processing

This is about making sure the reliefs better incentivise cutting edge R&D methods which rely on vast quantities of data that are analysed and processed via the cloud. 

Essentially, expenditure via licence payments on purchasing datasets which are used directly for R&D in a qualifying R&D project will qualify for the relief. However, companies won’t be able to claim relief where a dataset has been sold, or where it remains useful beyond the end of the R&D project.

Additionally, an end-user access agreement or licence between the claimant and the owner of the data will not qualify if it grants:

• Any rights of resale over the data
• The claimant any right to publish, share or otherwise communicate the raw data within the dataset to a third party
• Any ongoing rights of use, after the R&D project has ended

If an end user access agreement relates to more than one dataset, costs will need to be apportioned where only some (but not all) of them were used during the qualifying R&D project. This also applies if access to the data is granted as part of a suite of services.

Staffing costs for the creation of datasets

Collecting data for use as part of an R&D project is commonplace. If this data collection involves fieldwork, R&D tax relief can already be claimed on the staff costs needed to do this - an example would be overtime payments. Again, this is as long as the data won’t be sold on for commercial benefit, and a technical or scientific advancement is made.

Any staff costs relating to the collection, cleansing and analysis of the data can also be included in a claim, as long as the costs were entirely incurred for an eligible R&D project.

Focusing on innovation in the UK

R&D tax relief is designed to benefit companies as well as the wider UK economy. The government is therefore keen to make sure subsidiary benefits of the R&D work - such as improved skills - will benefit the UK first and foremost.

With this in mind, it is now proposing to only include payments in a claim that were made to subcontractors providing the subcontracted work took place in the UK only. This applies to both the SME scheme and RDEC. Furthermore, costs relating to externally provided workers (EPWs) will also only be claimable if the EPW is within UK PAYE/NIC.

The government is keen to hear views from stakeholders on whether there is a case for small numbers of exceptions to me made that would allow claims on some overseas R&D work.

Administrative changes to tackle compliance issues and fraud

The issue of R&D tax relief integrity, abuse and fraud is high on the government’s agenda. In fact, it is estimated that error and fraud across both schemes sit at around 3.6% of total relief cost, or £311 million.

The government is therefore looking to tackle the root cause of this problem, whilst limiting the impact on businesses that are compliant. The following changes will therefore be instigated:

• Regardless of whether a company is claiming under the SME scheme or RDEC, all claims must now be made digitally. However, companies exempt from delivering a Company Tax Return online will not be affected.
• Digital claims will need to contain more detail, for example what expenditure the claim covers, what uncertainties were overcome and what advancements in technology/science were made.
• Where a company is planning to make a claim for R&D tax relief, it must let HMRC know in advance
• Every claim submitted must now be endorsed by a named senior officer within the company
• If a company uses an agent or consultancy - such as Myriad Associates - to compile a claim, then the agency or consultancy’s details must also be included.

Further information

With the review ongoing, the government is expected to make further changes to R&D tax reliefs as time goes on. We will of course keep our clients updated as they occur.

Note that this article has highlighted the latest details and important points, however we strongly recommend reading the latest update in its entirety here. 

If you have any questions about the existing reforms, R&D tax reliefs in general, or how to make a claim, speak to our tax relief experts on 0207 118 6045. You can also send us a message and we’ll get right back to you.

Myriad Associates (member of HMRC’s R&D Consultative Committee) is proud of our seven-star customer service in achieving the R&D tax relief companies deserve. Having helped clients create and submit successful claims for over a decade, we can even triple the value of your claim compared to going it alone.

Still not convinced? Take a look at our recent blog to learn more: Why Reach Out To An R&D Tax And Funding Consultancy?