Response to R&D Tax Relief Consultation – Draft Guidance
Having reviewed the draft guidance, we welcome the Governments recommendations to reduce the amount of error, fraud and incorrect claims. We are also of the belief that new measures should be introduced in a targeted manner and aim to solve the problem in the long term. Many of the proposed measures seem to portray a negative outlook on R&D Tax Credits which will result in a significant reduction in R&D and investment in the UK.
Until now, UK R&D Tax Incentives have been very competitive, resulting in inward investment, creating jobs and incentivising companies to take risks in respect to new products, process, services, materials, devices and systems. Many companies rely on R&D Tax Credits for their investment in Research and Development, especially SME’s who, together with proposed increases in Corporation Tax rates, have had very little time to adjust and is further compounded by the fact businesses have faced a very tough time in the last 3 years with the Covid-19 pandemic, inflation, supply issues, energy prices and the current state of the economy, which is going to take time to recover.
Looking at each of the proposed measures set out by the Government, our view is as follows:
Overseas expenditure
The restriction on overseas costs is going to be hardest felt by start ups who often do not have the cash flow and stability to carry out all development activities in the UK and therefore need to outsource some of their R&D overseas, one notable example being software development, which is usually outsourced due to skills shortages and substantially higher costs in the UK. In order to balance this measure, we would propose that the Government allows starts up who are less than 3 years old to obtain relief on these costs without any restriction other than the statutory 65% cap, whilst all other SME’s using oversees third parties would see the total tax benefit on this expenditure restricted to the value of their of PAYE/NIC contributions. This would allow start-ups and SME’s – who form a vital part of our economy – to remain competitive.
Regarding the proposal whereby UK-based EPW’s must be subject to PAYE and National Insurance contributions (NICs), we feel this information may not always be easily available since it relies on the staff provider furnishing the claimant company with the relevant information, potentially restricting claims. Since the EPW cost category is vitally important and used by many businesses to provide the flexibility to deploy additional resource to R&D activity without committing to an increase/decrease its own headcount, we feel such a restriction should be implemented after a sufficient period of notice, allowing claimant companies to review their agreements/arrangements with staff providers to allow a provision to obtain this information in advance of engaging with the EPW.
In addition, international companies who share resources from their subsidiary companies would be severely impacted by this measure; we therefore propose that connected parties (as defined in the legislation) should be exempt from this measure.
Data licences and cloud computing services
We are pleased to see the change in legislation, which has been a long-awaited result of successful campaigning efforts. However, we recommend that the legislation be further elaborated to provide greater clarity on the treatment of this expenditure. This could be achieved through the inclusion of examples that would help claimant companies better understand how the expenditure should be accounted for and reported.
Claim Notification
It is our firm belief that the government should reconsider the requirement for claim notification, as such a requirement would only serve to restrict companies with legitimate claims and increase their administrative burden. Instead, we recommend that HMRC focus on investing in compliance resources to more effectively identify and address incorrect or fraudulent claims.
Furthermore, no restrictive measures should be imposed on new claimants as the relief should be easily accessible to any business engaged in qualifying activities as per the legislative guidance. This would ensure that the relief remains accessible to those who are entitled to it, without creating unnecessary obstacles or barriers to entry.
Additional Information
The additional information form is set to launch in April 2023. However, claimants will face issues as HMRC has not yet released a link to the form and does not intend to until its launch so this poses a challenge for those who wish to prepare in advance. While much of the required information is included in the R&D Claim Report, this duplication of effort creates an additional administrative burden for claimants.
To address these concerns, it is crucial to engage in a thorough consultation with all relevant stakeholders. The aim is to create a simplified form that captures only the essential information necessary to detect and counteract fraudulent or incorrect claims. It’s important to note that the form should not be used to deter legitimate claims. Rather, it should gather information on advisors who have assisted the claimant, enabling HMRC to more effectively detect and address any incorrect claims.