HMRC R&D Tax Relief Reform: Q&A with Inspired Managing Director, Eugene O’Neill
In recent weeks HMRC has published details of changes to the UK R&D tax relief schemes. These changes come on the back of the public consultation carried out earlier in 2021 and are anticipated to come into effect in April 2023 once legislation has been drafted and published. To reflect on the announcements made, we’ve sat down with Inspired MD Eugene O’Neill to discuss what changes lay ahead for UK Companies involved in R&D.
What would you say is the most significant detail from last week’s release?
It would be my view that the changes likely to have the most tangible will be the treatment of overseas R&D expenditure. Whilst the mechanics of these changes are not yet clear, the direction of travel for R&D policy is that the Government wants to focus R&D relief on innovation that occurs within the UK and as such upcoming changes have the potential to impact the eligibility of all costs incurred outside the UK.
The headline change in regards to overseas R&D is that companies can no longer claim for R&D activity subcontracted overseas? Have you considered how this will affect a company’s approach to R&D?
Thinking in the context of how a number of our own clients manage overseas activity, we can see examples of groups of companies who understandably keep staff fixed on a payroll in a single location, regardless of where they are undertaking work or what project they are delivering on. This is particularly pertinent with groups that have UK and RoI entities, where given the proximity of the two tax jurisdictions it is for example common for us to see RoI employees working on cross-border or GB projects.
It may be the case that where overseas employees are involved in delivering a UK R&D project that we would advise clients to transfer these employees to the UK payroll for the duration of the project in question. Consequently, we would also advise on the tax impact for the personnel involved. In a scenario like this, however, detailed supporting documentation and rationale would be crucial prior to taking such steps.
A number of steps have been taken to counteract abuse and compliance, what are your views on those?
Not as hard-hitting as what I would have anticipated in all honesty, but welcome nonetheless. Abuse of what is a great scheme can erode its credibility. Concerns come up in conversation with new claimants who despite their clearly innovative activity are hesitant to claim to avoid getting caught in hot water. One of the key messages we communicate to new claimants is that if and when there is a need to defend a claim with HMRC, your advisers should be visible and proactive. As such I think it’s the right move that HMRC are now requiring advisers to be named.
So how do you see these changes impacting the claims process?
For the majority of advisors and claimants, the impact will range from minimal to none. I’ve worked with a number of service providers prior to forming Inspired and digitally submitted claims accompanied by supporting reports is the status quo for reputable firms. I note that a named senior officer of the claiming company needs to endorse the claim; again, this is already often the case, especially for larger companies.
So, you would not be concerned about companies having to name a senior officer?
Well, I would have to reserve judgement here until we see the legislation, as the details so far on this leave a number of hypotheticals open. For me the key here is whether the senior officer signing this off needs to be or carry similar responsibilities to an SAO (Senior Accounting Officer), or can the senior officer be someone who is likely to be more closely involved with the R&D. I can see the potential for disconnect in scenarios where an SAO may feel too far removed from the R&D activity and corresponding claim to be in a position to endorse its validity. It also poses the question of whether rules similar to SAO rules will apply where a penalty could be forced upon signatory in cases of fraudulent claims.
Are there any other potential issues that could arise from changes announced to compliance?
I note wording that “companies will need to inform HMRC, in advance, that they plan to make a claim”. Again, we cannot speak in definitives until legislation is published but if this was to mean “in advance of the company’s year-end…”, then retrospective claims, which are frequently made by new claimants previously unaware of their R&D eligibility, will no longer be allowed. I don’t feel that would have a net positive impact and many companies could lose out in an arguably unfair manner. We will have to wait to see just how much advance notice is required once the legislation is published.
With regards to eligible expenditure- Data and Cloud Computing Costs have now been included as eligible for R&D relief, what are your thoughts on this?
A sensible and justifiable addition, given that these were the most frequently suggested additions fed back from respondents to the consultation. A few of our clients will be delighted with this as they are regularly in the business of having to purchase vast quantities of data to support their R&D activity.
So, in conclusion, what’s the overall impression?
The first comment I would make is that I can fully understand the rationale behind the introduced changes, particularly in relation to abuse, and I hope it would encourage claimants to take professional advice.
My main area of concern is with regards to how new rules on overseas R&D will impact companies who work regularly between RoI and UK. These companies are likely to be impacted and will have to restructure operations to ensure R&D is claimed in the appropriate jurisdiction.
In the main, the changes appear to be good changes, I’m sure however like many of my peers, we will await the legislation before coming to a more definitive conclusion.