Have your say on HMRC’s proposed changes to R&D tax credits

HMRC have an ongoing approach of adjusting aspects of R&D tax credits. Their latest proposals for reforms, which were outlined in November include a mix of items as follows (all proposed to commence on 1 April 2023), with the least controversial ones first:

• Expanding the current areas of qualifying expenditure for tax credits in the areas of datasets, data analytics and cloud hosting services. From the particular way in which the legislation previously covered software costs these haven’t been included before. There will still need to be some apportionment between these services used for R&D projects and those for general business use but as some of these costs are an important resource, particularly in technology companies this is a welcome change
• Some changes to the way in which R&D credits are reported to HMRC by the company (or its advisers). Some of these are just administrative (such as that claims will have to be supplied in digital form). Others include the need to pre-notify HMRC of a claim (to try to prevent spurious claims), and for a named senior officer of the company to sign off on the claim. Also the company will be required to notify HMRC of the name(s) of its R&D advisers. Generally, these reflect HMRC’s concerns about spurious or exaggerated claims
•  The proposal which is attracting most attention is that where the company uses subcontractors or externally provided workers, the cost will only be allowed for R&D credits where their work is performed within the UK. This will apply both for the SME scheme and the ‘RDEC’ scheme for other companies. It is also proposed that the company will need to confirm with such third parties that this condition of the work being performed in the UK is met and that in the case of workers supplied by other parties, that they are on a UK payroll. Clearly, many OBN and other technology businesses will use a range of subcontractors and other workers and this may affect them. Not only may this have the effect of limiting some claims where these costs are material, but there will be uncertainties in understanding and confirming where work is actually ‘performed’. Payment made to clinical trial participants seem to be excluded, but not the overall cost charged by a clinical trial subcontractor.

Whilst these changes, in particular regarding overseas costs, may be worrying, there is an on-going consultation and HM Treasury are seeking to understand the impact of these – for example, exemptions to the allowance of overseas costs for particular niches. Clearly it is important that the life sciences sector is vocal about specific cases – such as clinical trials – where exemptions may be given.

HMRC are seeking responses to these proposals by 8 February. While OBN is not submitting a formal response, members are welcome to feedback to the firms which support us in this area, either contact Margaret Savory msavory@jamescowper.co.uk or Katy Rabindran katy.rabindran@bdo.co.uk

Read the HMRC’s R&D Tax Reliefs Report here.

* Image adapted from Photo by Scott Graham on Unsplash