UK and International Tax news
Update On Consultation On R&D Tax Reliefs
Friday 17th December 2021
HM Treasury have recently issued their report on the consultation launched after the Spring Budget 2021 on Research and Development tax reliefs.
The two main tax reliefs available to companies undertaking R&D in the UK are:
- Research and Development Expenditure Credit (RDEC), a payable tax credit (subject to tax) equivalent to 13% of qualifying R&D costs claimed, and
- Research and Development tax relief for SMEs, a 230% deduction of qualifying R&D costs, or a payable tax credit worth up to 14.5% of the surrenderable loss of the loss-making company.
In the consultation, views were sought on definitions, eligibility and scope of the reliefs, how well the reliefs were operating for businesses and HMRC, and the targeting of the reliefs.
In the Autumn 2021 Budget, the government announced reforms to R&D tax relief, by expanding the scope of qualifying expenditure to include data and cloud costs, to refocus support towards innovation in the UK, and to target abuse and improve compliance.
The government now accepts that expenditure via licence payments on purchasing datasets, which are used directly for R&D in a qualifying R&D project, will qualify for relief. However, companies will not be able to claim relief for the cost of datasets that can be resold or have a lasting value to the business beyond the duration of the project. This is to ensure that relief can be claimed only for costs incurred solely for R&D and not for costs that can be reimbursed.
Where the end user access agreement covers multiple datasets, not all of which are to be used in a qualifying R&D project, or where access to data is granted as part of a wider package of services, the claimant will be required to apportion costs.
Costs for staff-related expenditure for the purpose of collecting, cleansing and analysing data will qualify for relief provided these costs are incurred for a qualifying R&D project.
The government will allow businesses to claim relief for the cost of cloud computing services used directly for R&D. Such services may include computation, data processing, analytics and software.
Where companies subcontract R&D activity to a third party, relief will only be available for that expenditure where that third party performs the work within the UK. The rules for subcontracting will not otherwise change. This will apply to the SME scheme, and a similar principle will apply in RDEC, where subcontracting occurs and where a company claims for contributions it makes for independent R&D of a qualifying body.
Under both schemes, where companies incur expenditure on payments for externally provided workers, they will only be able to claim relief on such expenditure where those workers are paid through a UK payroll.
Where a company subcontracts work for performance overseas, it will not be able to claim R&D tax relief on that expenditure but will still be able to deduct those costs from taxable profits in the normal way.
Companies will still be able to claim R&D tax reliefs on the costs of software and consumables sourced overseas, as well as payments for clinical trials, volunteers overseas and payments for data and cloud sourced overseas.
Respondents’ views will be considered in the next phase of the review and draft legislation will be published in the summer of 2022, for inclusion in the Finance Bill 2022-23, to take effect from April 2023.
If you would like more information on the above, please contact Keith Rushen on 0207 486 2378.Contact Us