Rishi Sunak’s appointment as PM gives us much-needed clarity on the future of R&D Tax Relief.
It’s official. Rishi Sunak is the new Prime Minister, our third in less than two months.
After a period of immense political turmoil, Sunak will hope to bring stability and confidence back to Westminster and unite the Conservatives behind his plans to tackle the cost of living crisis, inflation, market unrest, worrying economic forecasts, and – here’s hoping – the climate emergency.
Change is afoot
Sunak’s appointment gives us much-needed clarity on the future of R&D Tax Relief, a generous scheme that rewards companies that are conducting research and development with cash credits and tax reductions.
In the 2021 Budget and Spending Review, Sunak, then the Chancellor of the Exchequer, announced two major changes to the scheme; expanding qualifying expenditure to include some cloud computing and data costs and limiting relief on overseas subcontractor and externally provided worker costs.
Sunak also announced that HMRC would be launching a thorough review of the scheme’s ability to incentivise innovation and vulnerability to fraud. Based on its review, HMRC proposed a series of significant reforms to the scheme’s administration. The reforms included requiring companies to file digitally through HMRC’s tax return portal and to submit details of consultancies that have helped them with their claim.
If legislated, HMRC’s proposals and the changes announced during the 2021 budget would represent one of the largest modifications in the scheme’s twenty-two-year history.
You can read a detailed breakdown of HMRC’s proposals and what they would mean for your company here.
Finally, some clarity
With Westminster in a state of chaos and fiscal policies being ditched left, right, and centre, it wasn’t clear whether the government was ever going to sign these modifications into law. Nor was it clear whether any of the various Chancellors that took office following Sunak’s departure would share their predecessors’ concerns that the scheme was subject to widespread abuse.
But now the man driving these reforms has assumed the highest office in the land, there remains little doubt that they will become a reality.
HMRC’s proposed changes to the R&D Tax Credits scheme are currently in the draft of Finance Bill 2022-23, which Parliament is due to debate early next year. If the bill passes – and it’s a relatively safe bet that it will – the changes would affect financial periods starting on or after 1 April 2023.
House of Lords inquiry
On 14 October, the House of Lords Finance Bill select committee announced it would be exploring these reforms and invited outside parties to contribute to its investigation. The committee is particularly interested in “the experiences of SMEs in claiming relief and how they expect the changes set out in the draft legislation to affect them”.
My colleagues and I will be contributing to this inquiry.
While we broadly support the proposed changes, we will be voicing our concern over plans to make overseas subcontractor costs ineligible for relief. Overseas subcontractors are essential to early-stage R&D. With inflation soaring, and investment in early-stage technology companies falling, removing this relief could hamper the ability of younger startups to innovate. This decision would run counter to the government’s ambition of increasing national investment in research and development to 2.5% of GDP.
We will also argue that the government must provide more information about the future claims process, specifically, the technical information companies will be required to submit alongside their financial calculations.
While we write a detailed technical narrative for all of our clients, we worry that, without clear guidance, companies that do not work with an R&D Tax Credits specialist and lack experience in simplifying technical concepts for tax inspectors will struggle to demonstrate that their development work qualifies for relief. This may mean that they face a lengthy compliance check, delaying their funding by several months.
If you have any questions about how the forthcoming changes to R&D Tax Credits will impact your claim or would like expert support preparing your upcoming submission, just get in touch.
Our R&D Tax Credits specialists are here to help you file a fully-maximised claim, defended by a technical narrative written by our technology and scientific experts.