Research and Development Tax Relief Changes 2023
What are the new changes for R&D tax relief incentives in the UK?
Most of our clients at Dragon Argent are innovative, technology enabled business who are therefore eligible for HMRC’s R&D Tax Relief incentive. From 1 April 2023, there are several changes to the UK R&D scheme to be implemented as a result of the 2021 Budget. Our business tax accountant felt it useful to summaries these in this week’s newsletter with some help from our Head of Tax, Misha Patel.
Some of these changes will affect businesses in different ways but they could have a significant impact on the total of your tax credit from HMRC. The two most significant changes are:
Restrictions for businesses performing R&D activities overseas, and
The addition of cloud computing and data costs within the R&D expenditure
Refocusing Reliefs to Innovation in the UK.
Costs subcontracted overseas will no longer qualify for relief. (There will be an exception where there is significant or regulatory requirement for this work to be conducted abroad). Companies undertaking subcontractor activities abroad will now have to investigate whether for research and development purposes they want to move their subcontracted operations to the UK to ensure those cost are recoverable.
Keeping your R&D Activities Overseas
Whilst the UK have many highly skilled technical professionals, hiring in the UK can become challenging. Hiring experienced developer teams abroad, who have the capabilities and specialist knowledge required, can also be far more cost effective.
Ultimately the decision will depend on whether the claim under the SME scheme or the RDEC scheme is more lucrative than the cost saving of subcontracting work offshore. If you are a company which has majority of their subcontracted costs abroad then you may see a reduction in your research and development tax relief claim.
Relocating your R&D Activities to the UK
As mentioned above there are many technical professionals in the UK, however relocating your activities to the UK will depend on finding the required competencies within your budget. You may see an increase in your costs however simultaneously you will be able to claim back up to 33% of these costs via the R&D tax relief scheme.
Externally Provided Workers (EPWs)
EPWs are temporary workers provided by an external company, most typically through a staffing or recruitment agency. Where expenditure is incurred on EPWs they will only be able to claim relief where those workers are paid via the UK Payroll.
Cloud Computing
Following initial announcements in the Autumn budget, it was confirmed in the April budget that companies will now be able to claim eligible costs on cloud computing (to include expenditure on license payments for data sets and cloud computing cots attributed to computation, data processing and software) where they have been incurred as part of a qualifying R&D project.
These costs will be important to enabling businesses to be able to adopt the latest technologies, such as AI.
R&D Compliance
Companies will need to notify HMRC 6 months in advance if they would like to make an research and development claim. For companies that have filed a claim in the previous 3 years; they do not need to notify HMRC.
All claims will need to be endorsed by a named senior officer of the company and claims will need to include details of any agent who has advised the company on compiling the claim.
Digital claims will require more detail on qualifying R&D expenditure
Dragon Argent’s business tax accountant has extensive experience working with research and development tax relief claims, if you would like to discuss the above changes and how they will impact your business please schedule a discovery call with Misha Patel, Head of Tax.
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