AAB advises stay on-track as R&D tax rules evolve
Following recent consultation on changes to categories of research and development (R&D) expenditure, to align the availability of R&D tax relief with current innovation activity, Chancellor Rishi Sunak confirmed in his Autumn Budget that cloud computing and data costs will be included as qualifying expenditure categories from April 2023.
For many years, tax advisors have lobbied HM Revenue and Customs (HMRC) to open their eyes to the fact that R&D legislation that was current at the start of the millennium is now out of date. Technological advances and digital involvement in innovation have moved beyond what was considered when the R&D tax relief legislation was introduced.
Changes in HMRC guidance on R&D have been made in an effort to bridge the gap, but it has not been enough to allow digital costs – evident in almost every R&D project – to be included in qualifying expenditure.
Thankfully, it has now been acknowledged that legislation needs to evolve and this is a favourable first step in modernising R&D tax relief.
With the Westminster government’s intention to keep the UK at the forefront of world innovation, this step will assist by bringing UK qualifying expenditure in line with other countries.
How this will work has still to be confirmed by HMRC, as no guidance has been released on these new rules.
Given that digital-related costs form a principal part of most companies’ R&D projects, the content of the guidance will be vital, as it is likely that claims post-April 2023 will be significantly increased through this extension.
It is therefore worthwhile for innovative companies to ask their tax advisor to help them keep track of the guidance, and consider how their reporting processes will be amended to capture these new costs for inclusion as qualifying R&D expenditure, on which enhanced tax relief is available.
However, where there is an enhancing change to a tax, there is typically also a change which constrains the relief in another way.
The Chancellor did not let us down here, as he made a change aimed at keeping the UK at the forefront of world innovation.
The announced constraint will see R&D activities that are physically undertaken outwith the UK excluded from a claim for R&D tax relief from April 2023.
This change is being introduced to ensure the UK benefits from R&D being undertaken within its borders, with the intention of fostering even more R&D in Britain over the long term.
The Chancellor introduced this amendment to R&D tax legislation in response to data that suggested more than 50 per cent of spend on R&D in claims made by British companies was being undertaken outwith the UK.
The change does not align with the consultation findings that the UK will benefit from modernising its R&D relief to reflect businesses that utilise international specialists, suppliers and staff to maximise the output from its innovation expenditure.
Leading up to the change, British companies undertaking R&D activity outwith the UK will need to consider its impact as – post-April 2023 – it is likely R&D tax claims would be significantly reduced.
This may have a knock-on effect on the quantum of R&D activity a company can afford.
Again, we will need to seek direction when HMRC issues guidance on this change.
Alejandro Alcala-Canales is a corporate tax senior manager at AAB