Research and Development (R&D) tax relief is intended to promote and reward scientific and technological innovation in the UK. To be eligible, a business must demonstrate that it has made an advancement in a scientific or technological field.
Since its origin in 2000 limited changes have been made to the scheme, but now there are substantial reforms in the pipeline coming in April 2023.
It could be possible for companies to increase the value of their claims, while encouraging more problem-solving initiatives to claim tax relief for the first time. Although these changes could help some companies, there remain some significant dangers to watch out for, and companies even run the risk of losing money if not well informed.
A Welcome Update To The R&D Tax Relief Scheme
The rules urgently needed updating to reflect the current technological work ecosystem, having remained largely unchanged for around 20 years.
Innovation no longer refers to just the creation of a physical product or process, it can also mean analysing ‘big data’ or programming AI software to process market or business data.
The eligibility criteria must be amended to take account of these changes. Some long-awaited changes are now in the pipeline and tax relief spanning investment in cloud computing and data-based initiatives, will soon be introduced.
Companies pay substantial sums for computer-based technologies, modifying them for their own operational requirements and in principle many may benefit from the widened scope of the reliefs.
What changes are being made to R&D Tax Relief?
Mathematical Modelling Vital For Innovation
Historically HMRC would only permit companies to claim for tangible technological advances, despite many arguing that software innovations, along with the algorithms and mathematical modelling used to deliver them were vital to increasing productivity and bolstering business performance.
However, HMRC may have changed their stance as the new scope of R&D tax relief could encompass investment in mathematical modelling and resulting innovations.
Introduction Of A PAYE/NIC Cap
While not a new announcement, many companies are still uninformed about the Government having announced an employer PAYE/NIC cap in April 2021, to promote the use of more UK-based staff in companies. The cap limits the repayable tax credit to £20,000 plus 3 times PAYE/NIC.
This will impact many start-up businesses and even some bigger corporates where the structure is such that one company conducting a project uses employees from another. Once more, there are concessions, but these will also need to be considered on a case-by-case basis.
A Move To Encourage UK Innovation
The UK Government wants to advance the fields of science and technology and incentivise business investment in innovation to help grow the UK economy. The best way to do this is to ensure the R&D tax relief scheme is fit for purpose and genuinely encouraging innovation in the UK.
Plans To Restrict Overseas Costs
To enlarge and mature the UK’s skills base, while augmenting income tax and national insurance receipts, the proposed reforms will limit overseas costs. Presently, businesses can use overseas subcontractors in places like India and Eastern Europe to safeguard their business from domestic labour shortages and costs.
HMRC has said that this will change going forward, though there might be concessions if the business can demonstrate that an expertise or skill cannot be found within the UK. Though, these situations will be reviewed on a case-by-case basis. This change may have a far greater impact on start-ups, where each penny counts, but businesses of all sizes will be affected to some degree.
A Need to Review Ahead Of The Changes
In readiness for the changes next year, companies should review them in depth to gauge whether projects that already benefit from R&D tax relief will meet the requirements moving forward. There is also the possibility that projects that haven’t qualified in the past could do so in future.
Consulting a tax professional at the start of projects means expenditure can be tracked during the year, making it simpler to capture spending that could be eligible under the new guidelines for R&D tax reliefs.
Switching Staffing Models
In advance of the changes, now could also be a good time to have an in-depth evaluation of staffing for projects. For instance, a cost/benefit analysis can be used to assess whether it would be more advantageous for the business to continue using cheaper international labour or change to a UK-based staffing model, allowing an unrestricted R&D tax relief claim.
Conclusion
Although these significant reforms will open the door for more businesses to benefit from R&D tax relief, there may be drawbacks for some. All businesses will have to review the new legislation so that they can make informed decisions about future R&D projects. Contact us below for more guidance.
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