CONTROVERSIAL ADMINISTRATIVE CHANGE FOR R&D TAX RELIEF FROM 1ST APRIL 2023

Draft legislation for upcoming changes to R&D tax relief were revealed as part of Legislation Day, back in July. There were few surprises where R&D tax relief was concerned as many of the forthcoming changes had been widely publicised already.

The key changes include:

The expansion of qualifying expenditure to include data and cloud computing costs associated with R&D activity. Currently, only the cost of software licenses is eligible for the relief.
Refocusing the reliefs towards innovation undertaken in the UK. A new condition will be added which dictates that the expenditure on subcontracted R&D and externally provided workers (EPWs) must be incurred within the UK. Where the activity is performed overseas, additional relief will be denied from 1st April 2023.
New legislation will be introduced with effect from April 2023 to require that all Corporation Tax returns that contain an R&D claim, including amended returns, must be submitted digitally through HMRC’s tax return portal.
Claims will need to include details of any agent who has advised the company on compiling the claim.

Whilst these changes are largely supported by many associated with the relief, one aspect of the new legislation is likely to cause consternation amongst advisers and claimant companies. HMRC had already suggested that from April 2023, a requirement to pre-notify HMRC would be introduced. Legislation Day provided more clarity on this aspect of the forthcoming changes.

From 1st April 2023, companies will need to inform HMRC, in advance, that they plan to make an R&D claim. They will need to do this, using a digital service, within 6 months of the end of the period to which the claim relates.

Thankfully, the announcement contained a key exemption to the pre-notification requirement. Companies that have claimed in one of the preceding three accounting periods will not need to pre-notify. This is welcome news for all companies which have claimed R&D tax relief in a recent accounting period.

Despite this, the impact of the new changes cannot be overstated for companies which have not previously made a claim for R&D tax relief (or have not claimed in the last 3 years). Under current rules, a company is often able to make a claim for the previous two accounting periods by taking advantage of the statutory right to amend a tax return up to 12 months after the filing deadline. For example, at the time of writing (August 2022) a company with a 31 December year end could feasibly make a claim for the 31 December 2020 period, as well as the more recent 31 December 2021 period. The deadline for a 31 December 2020 claim would be 31 December 2022 (i.e. 12 months after the statutory filing deadline of 31 December 2021).

Under the new rules, and assuming the company had not made a claim in any of the preceding 3 accounting periods, the company would not be able to make a claim for 31 December 2020 as it would not have pre-notified HMRC of its intention to claim. In addition, a claim for the 31 December 2021 period would also be denied as the pre notification rules dictate that notification must take place within 6 months of the end of the accounting period in question. This would therefore mean the deadline for notifying HMRC of a claim for 2021 would be 30th June 2022 – a date which has now passed. This is despite the fact that the statutory deadline for filing a return for 31 December 2021 has not passed.

Whilst we support many of the measures introduced by HMRC to combat fraud and error in the system, we’re viewing the pre-notification rules as questionable at best. Many view the change as grossly unfair.

What does this mean for potential claimant companies?

The pre-notification rules mean that companies who intend to make claims for a prior accounting period must take action before 1st April 2023. After this date, previous accounting periods will fall out of the window for making a claim. It’s therefore imperative that companies who are planning to make a claim take immediate action. We can advise on the various timing issues which will be presented as a result of the forthcoming changes.

The message is clear. If you’re thinking of making a claim and haven’t made a claim in the last 3 years, act now.

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CONTROVERSIAL ADMINISTRATIVE CHANGE FOR R&D TAX RELIEF FROM 1ST APRIL 2023

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