Expansion of allowable costs
Currently, only the costs for installed software are allowable, which excludes cloud computing and data costs. So, it is pleasing to see that qualifying costs are being modernised in line with new technologies and trends.
Questions that may arise might include:
What costs does data and cloud computing actually cover?
We are still waiting for the full detail to clarify this point. However, we expect it will include the typical costs involved in hosting software and data in the cloud, cloud-based working, data analysis/analytics and data purchase costs.
Could this mean that a cloud system we developed during the pandemic might be eligible for an R&D claim?
Again, we are still waiting for the additional detail on this, but if it meets the new criteria as well as the overarching criteria for making an R&D claim then it may open the door for expanding your existing claim or establishing a new claim.
What if we have been claiming data and cloud costs under previously HMRC approved claims?
The answer to this is you may have included an ineligible cost in your claim. HMRC has the ability to go back four years to review claims and, if they discover something is incorrect through dishonesty, they can go back up to 20 years. They can reclaim the R&D tax credit payments and also issue penalties of up to 100% of the amount claimed. If you are worried about your claims, it may be the point to seek an advisor who is experienced with R&D claims and honest about what is and isn’t allowable.
R&D carried out overseas
Currently, a UK company can outsource all of their R&D to overseas companies and still claim R&D tax relief on these costs. This puts us drastically out of step with Australia, Canada, Hong Kong, Singapore, Switzerland and the US, which have all focused their R&D tax reliefs on domestic activity.
It was announced in the Autumn Budget that from April 2023, businesses will only be able to claim R&D tax credits on R&D work undertaken in the UK to “incentivise greater investment here at home”.
Again, there is currently no further detail on this change, how we will submit UK sub-contracted R&D in the claim and how it will all be policed by HMRC.
Whilst we await further detail, businesses may seek to carry out cost vs benefit analysis of whether to bring overseas R&D to the UK or continue as usual. But remember, the tax relief is probably only one element of the decision. Wider commercial factors such as the availability of technology, skills and resources, should also be considered.
Tackling abuse
Again, further details are to be announced on how HMRC intends to tackle abuse of R&D tax claims.
We always advocate that it is important to use an experienced and professional advisor who understands what is and isn’t allowable. Being creative with the truth may just cause further problems down the line, which, with HMRC’s focus on tackling abuse, becomes ever more likely.
What does this all mean for you?
The government announced that further details on these changes will be made available later in the Autumn. We will keep a look out for these details so that we can advise our clients carrying out R&D claims.
In the meantime, businesses, especially those that outsource R&D abroad, may want to consider in advance how these changes might impact their R&D claims.
You can find out more about our R&D Tax Claim service here.
With more than 20 years in tax, Paul provides tax compliance and advisory services to clients, and specialises in R&D and capital allowance claims.