On 20 July 2022 – dubbed Legislation Day or ‘L-Day’ – the Government issued draft legislation for the Finance Bill 2022/23, which includes reforms to the research and development (R&D) tax relief schemes. So, what might these changes mean for you?
What is R&D tax relief?
R&D tax relief rewards UK companies that invest in innovation. Limited companies can reduce corporation tax liabilities by 24.7 per cent, and loss-making companies can reclaim 33.35 per cent of money spent on qualifying research and development.
R&D is available to businesses in any industry – at Champion, we have assisted in making successful claims in the fields of engineering, app and software development, manufacturing, food & drink, construction, waste and recycling, chemical production, and digital marketing. If you are undertaking innovative work, you could qualify for tax relief that changes the trajectory of your business, and your ability to invest in growth.
Why is the Government changing R&D tax relief?
The Government has a target to raise total investment in R&D to 2.4% of UK GDP by 2027, and R&D tax relief has a key role in incentivising this investment. By reducing the costs of innovation, it was crucial that the reliefs are up-to-date, competitive and well targeted.
A major aim is to ensure that all innovation is carried out in the UK. This will largely impact large corporations – rather than SMEs – who sub-contract R&D to third parties outside of the UK. There’s also a hope that the changes to the way R&D tax relief is awarded will draw more businesses to the UK.
Additionally, the reforms are intended to combat fraud and increase compliance. Around £311million of relief is thought to have been given in error, often to companies advised by people who are not qualified or vetted. The new system should also make applications and payments more efficient.
Finally, the changes will update eligibility criteria to modernise and welcome new industries into the scheme.
What is changing in R&D tax relief?
Reform of R&D tax relief includes the following changes:
- Sub-contracted R&D will only qualify as R&D expenditure if the work is carried out in the UK with very narrow exemptions available
- Payments to externally provided workers will only qualify where the salaries are paid through a UK payroll
- Qualifying R&D expenditure has been expanded to include the cost of some datasets and cloud computing services
- The exclusion of pure mathematics as a qualifying activity will be removed
- R&D claims will become fully digital unless your company is exempt from filing a tax return online
- Claimants will need to give advance notice to HMRC that they intend to make an R&D claim within six months of the end of the period to which the claim relates
- A senior member of the business will endorse every claim by name
- The time limit to make a claim will be two years from the end of the accounting period rather than 12 months from the statutory filing deadline – providing more time to make a claim
- Any advisors who supported the company in its claim will need to be named
When do the changes to R&D tax relief come into effect?
The outlined timeline sees changes come into effect for accounting periods beginning on or after 1 April 2023.
How will this impact claims made on behalf of Champion’s clients?
There are other changes within the draft legislation to address anomalies and unforeseen consequences, which we do not expect to impact many businesses but, these are welcome changes that clear up confusion within the R&D tax relief schemes.
Overall, however, we view the changes as beneficial. A crackdown on fraud will mean more opportunities for genuine innovators, and the introduction of new sectors to the scheme widens the scope for relief where it’s deserved.
As experts in the field, we’re also buoyed by the measures that will prevent unqualified advisors from misdirecting businesses or making fraudulent claims.
We’ll be watching developments on this topic closely and working with our clients to ensure that they receive exactly what they’re entitled to for their hard work and dedication to driving progress.
If you think your business might qualify for R&D tax relief, it will be more important than ever to start the claim process quickly to avoid losing out on the ability to make a claim. Take a look at our R&D tax relief calculator, or contact our R&D tax lead, Martin Frain, in our Manchester office on:
E: Martin.Frain@championgroup.co.uk
T: 0161 703 2500
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