As anticipated, HMRC published their draft guidance on 20 December on the R&D tax credit changes affecting accounting periods beginning on or after 1 April 2023. This guidance is subject to feedback, closing on 28 February, but we expect it to remain similar to the outline in the draft.
The guidance is mostly in line with what we expected. Here are what we think are the most significant points:
Overseas R&D expenditure
While little has changed, more guidance has been provided around overseas R&D expenditure.
Starting from the accounting period on or after 1 April 2023, the reform states that subcontracted R&D work and the cost of externally provided workers (EPWs) will be limited to work done in the UK.
However, the draft legislation needed more concrete information on the overseas qualifying expenditure that does qualify. The guidance has now provided more detail on the three exemptions:
- The first factor is that conditions necessary for R&D are not present in the UK.
- The second is that the conditions are present in the location where the R&D is undertaken.
- The third factor is that it would be wholly unreasonable to replicate the conditions in the UK.
You can find extra clarification on ‘conditions’ and ‘wholly unreasonable’ scenarios throughout the draft guidance, but here’s a helpful example offered by HMRC:
If the R&D involved placing sensors on active volcanoes, this clearly requires a condition (the presence of a volcano) that is not present in the UK and one that would be wholly unreasonable to replicate. And it is a condition that exists in places outside the UK. So this activity would be Qualifying Overseas Expenditure (QOE) if undertaken in a location where the necessary conditions arise.
Legal or regulatory requirements
HMRC have also stated that legal or regulatory requirements may be relevant and qualify as overseas expenditure. For instance, if the activities need to occur in a particular country or according to recognised regulatory principles that are not obtained in the UK, then this could qualify.
Additionally, if a regulatory body decides that activity must occur in a particular country or imposes requirements that make that necessary, this is a regulatory requirement. For instance, if testing of a drug must be done according to a method agreed by a regulatory body and that body decides it must take place overseas, then this could qualify. Once again, you can find further clarity in the document.
Extending qualifying expenditure
There are no surprises here: qualifying expenditure for R&D tax credits will be extended to include cloud computing and datasets. Pure mathematics will also be included as an eligible qualifying expenditure for the definite accounting periods beginning on or after 1 April 2023.
Nevertheless, ‘pure mathematics’ has finally been given a concrete definition in the guidance. You can find the definition here BEIS guidelines.
Requirement to notify intention to claim
Further details on the requirement to submit a claim notification were also published in the draft guidance.
If it’s your company’s first time claiming R&D tax relief and your accounting period starts on or after 1 April 2023, then you will need to submit a Claim Notification. And if your company has previously claimed, but hasn’t made an R&D tax relief claim in any of the previous 3 calendar years, then you will also need to submit a Claim Notification.
To learn more, read our quick, easy guide that covers every question you may have about the claim notification.
Requirement to provide additional information
All claimants must submit additional information from the accounting period starting on or after 1 April 2023. The draft guidance has now detailed exactly what this additional information is:
- VAT Number.
- Contact details of the main internal R&D contact at the company.
- Contact details of any agent working on the claim.
- Qualifying expenditure under the following categories:
- Employee costs
- Externally provided workers
- Contracted out R&D
- Software
- Consumable Items
- Payments to participants of a clinical trial
- Data licence (for accounting periods starting on or after 1 April 2023)
- Cloud computing services (for accounting periods starting on or after 1 April 2023)
- Contributions to independent R&D costs (RDEC only)
- Show the amount of the above that is qualifying indirect activities (QIAs)
- Show the number of projects claimed for
- Descriptions of the projects under 5 headings:
- What is the main field of science or technology
- What was the baseline level of science or technology that you planned to advance?
- What advance in that scientific or technical knowledge did you aim to achieve?
- What scientific or technological uncertainties did you face?
- How did your project seek to overcome these uncertainties?
- For 1 to 3 projects, the company will need to describe all projects, covering 100% of the qualifying expenditure.
- For 4 to 10 projects, it will need to describe projects that account for 50% of the total expenditure, with a minimum of 3 projects described.
- Show the number of EPWs who worked on the above projects.
- PAYE scheme reference for those EPWs (suggesting that HMRC expects to see a linked PAYE reference for any costs to be accepted as EPW costs).
This will have to be submitted digitally through a g-form, which will go live in April 2023 on the gov website.
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