Changes to the research and development (R&D) tax relief rules will be introduced from 1 April 2023. HMRC published draft guidance on some of these changes on 22 December 2022. It includes five sections:

1. Restrictions on relief for overseas expenditure.
2. Extension of relief to include data licence and cloud computing costs.
3. A new requirement to make advance notification of R&D tax relief claims.
4. Inclusion of R&D activities relating to pure mathematics. 
5. Additional information to be provided in an online form in support of an R&D tax relief claim.

ICAEW’s Tax Faculty has provided feedback to HMRC on this guidance. It has highlighted uncertainties that remain despite the publication of the draft guidance. It has also highlighted some areas of the changes for which guidance has not yet been produced.

Restrictions on relief for overseas expenditure 

Restrictions will apply to expenditure on externally provided workers and by sub-contractors (third parties engaged to carry out R&D work on behalf of the tax relief claimant). 

A particular problem arises in respect of sub-contractors. It is not clear how claimants are expected to check where the work performed by sub-contractors was carried out. For example, there may be commercial sensitivities or GDPR issues that prevent the sub-contractor from providing this information. The draft guidance does not make it clear how to navigate these situations. 

The restriction on sub-contractor expenditure only applies where the conditions necessary for R&D are not present in the UK and it would be wholly unreasonable to domestically replicate the conditions necessary for the work to be carried out. 

HMRC’s draft guidance includes some examples of what “wholly unreasonable” means in this context. For example, medical factors such as the incidence of a disease, availability of volunteers to trial a drug, or other medical treatment, would be wholly unreasonable to replicate in the UK. However, this is a relatively clear-cut example. The faculty would welcome the inclusion of more esoteric examples to resolve the uncertainties created by this legislation. 

Data licences and cloud computing services 

The draft guidance also includes details of the data license and cloud computing expenditure that falls within the definition of qualifying expenditure in accounting periods starting on or after 1 April 2023. Complications arise where work-in-progress projects straddle accounting periods pre and post this change. The faculty would appreciate if this was brought to the reader’s attention. It requests that more detail is included in the draft guidance to clarify the treatment. 

Additional information form 

The draft legislation published on 21 July 2022 states that a claim is invalid unless information is provided to HMRC in accordance with regulations yet to be published. 

The draft guidance says that this information must be provided on an “Additional Information form”. The guidance goes on to list the information that will need to be provided on the online form. Although it says that the form will be live in April 2023, claimants may wish to know before then what information they will need to collate in order to complete the form. 

In its feedback, the Tax Faculty sets out a number of uncertainties that remain regarding the information to be provided, which include the following: 

• Will a single form be allowed for projects that span multiple accounting periods or group companies? 
• What information exactly is required in respect of externally provided workers involved in the project? 
• What information is required in relation to agents involved in the claim? 
• What information is required to summarise each of the projects included in the claim?
• What other information would claimants expect to provide other than that included in the form? 

Read ICAEW REP 09/23 in full.