The draft clauses for Finance Bill 2022 set out a variety of changes to R&D tax relief that have been consulted on previously.

The first of these relates to the restriction on relief for expenditure subcontracted by a company to a party outside the UK, or carried out by externally provided workers outside the UK. The draft legislation includes a carve out for R&D activities undertaken outside the UK where it would be “wholly unreasonable” for a company to carry out those activities in the UK.

While ICAEW sees the logic in restricting relief for overseas R&D expenditure as a way to encourage activity to take place in the UK, it is concerned that it could have the opposite effect; moving R&D hubs outside the UK to a regime that is more amenable to cross-border R&D projects. In its response, ICAEW therefore called for a more expansive carve-out from the restriction on non-UK activities.

Similarly, ICAEW is concerned that a requirement for companies to “pre-notify” HMRC of their claims in some circumstances could prevent them from making valid claims, therefore diverting R&D activity elsewhere. The pre-notification (for which details are not yet available) would need to take place six months from the end of the accounting period for which the claim is made. That shortens the timeframe in which companies need to determine whether they have a valid claim.

This timeframe could be even shorter in cases where the company has a long period of account. ICAEW has therefore called for the pre-notification deadline, if introduced, to be based on the end of the period for which accounts are produced, rather than the claim periods contained within that “period of account”.

Two further administrative changes will require prescribed information to be provided in support of each R&D tax relief claim and give HMRC the power to remove claims made ‘in error’ from the relevant tax return.

ICAEW understands that this power is only intended to be used where the company has not made a pre-notification of the claim or has not provided the necessary information. However, the draft legislation does not define what “made in error” means.

ICAEW is therefore concerned that this power could be used in a wider set of circumstances. It has suggested that “made in error” should be defined to refer only to a lack of pre-notification or prescribed information accompanying the return.