The government today published parts of the 2022/23 Finance Bill, which will ultimately become the 2022 Finance Act. Following a period of consultation and various releases over the last year, this was hotly anticipated in terms of R&D Tax Relief, as some radical changes are coming with effect from April 2023.
Broadly we knew what these reforms were going to look like, but did not know the precise details, and the Finance Bill now gives a lot more information about where things are heading. As with any Finance Bill, this still has to pass through numerous sittings and may go through more changes before it becomes law, but significant changes are unlikely.
Time limits for claims
The most significant change revolves around time limits. Currently the requirement is for a company to submit a claim for an accounting period within 2 years of the end of that period (so for a year ended 31 December 2020, the claim has to be filed by 31 December 2022).
This time limit does not change, but what is new is a second requirement to “pre-notify” to HMRC the intention to make a claim for a period. The reasoning behind this is that the government want R&D reliefs to affect decision making in businesses – i.e. it should be a factor in deciding to undertake R&D, not an afterthought to get some money back.
This “pre-notification” should be made within 6 months of the end of the accounting period for which a claim will be made. The notification must be using a digital service, so further details of this will follow in due course specifying what is required in that notification.
If this rule were already in place, in my example above a claim could only be submitted by 31 December 2022 if the company had previously notified HMRC that they intended to claim for the period, by 30 June 2021 – so if they had not done so they would now be out of time.
Interestingly, there seems to be nothing to stop a company from making a pre-notification, but then not actually making a claim – so might we see accountancy firms making protective notifications for their company clients in bulk, just in case? We will need to await the further details of what is required in the notification before we can know for sure if this will be effective.
Companies that have already made a claim in one of the three previous accounting periods will not be required to pre-notify, so there is no need for repeat claimants to do this every year.
Increasing transparency and reducing spurious claims
There are then three changes designed to reduce questionable claims being put in by less reputable firms:
- The claim must be submitted digitally, and be accompanied by a report detailing the projects applied for, and a calculation of the costs claimed. Reputable firms will already have done this for some time, but this has never been more than simply good practice, and less reputable advisers have taken the opportunity of low resource to police claims at HMRC to put in very simplistic claims with no documentation.
- The claim must name the adviser who has assisted with the claim – this will clearly put any more questionable providers in the spotlight.
- The claim must also be signed off by a named officer of the company – this will ensure that someone senior at the business is fully aware of the details of the claim and willing to put their name to it.
We have been assured through the consultation that the named officer is not putting themselves personally at risk of sanction if a claim should turn out to be incorrect – this is purely a means of the government trying to make sure that someone senior in the company is reviewing the claim properly.
Refocusing relief towards innovation in the UK
The rules are being changed, broadly, to exclude the costs of off-payroll personnel who are not UK based. This is a big change that will affect IT companies in particular, which may have overseas development teams.
These costs will still be permitted in certain circumstances, for example where factors not present in the UK are important to the R&D (such as geography, environment or population). Using overseas manpower on grounds of saving costs will not be a valid reason to permit relief.
We had thought that there might be a “de minimis” limit allowing a certain amount of such overseas costs (perhaps a percentage of total costs claimed) but there is no sign of this, so this does appear to be a complete blanket exclusion now.
And the good news…
While the above changes are all about tightening up the rules and reducing more questionable claims, there is good news in that the scope of qualifying costs is being increased.
In particular, the government has recognised the importance of complex mathematics for technical R&D, and the rules are therefore being amended to remove the previous exclusion for costs relating to developments in pure maths.
In addition, the scope of qualifying costs is being extended to include the costs of datasets and cloud computing.
When are these changes effective?
All the above changes take effect from April 2023 – specifically, from the first accounting period which starts from 1 April 2023 onwards. So, for example, a company preparing its accounts to December annually will be affected from January 2024 onwards.
There is time to prepare for these changes, but the key message here is to consider these reliefs sooner rather than later, because by leaving it too late businesses risk losing out on a lot more relief than they could currently.
To discuss your company or clients please contact James Geary on 01242 776000 or firstname.lastname@example.org, or a member of his team. We offer a free, no obligation initial meeting to discuss the potential for claims, and also work with many local firms who need an expert to help their clients to claim, or sometimes just an honest assessment of potential eligibility.