The Economic Affairs Finance Bill Sub-Committee report on draft clauses in the Finance Bill 2022–23 focused on the reforms to research and development (R&D) tax relief that apply from 1 April. These include changes to the definition qualifying R&D expenditure and administrative provisions for making claims.
The Economic Affairs Finance Bill Sub-Committee has welcomed the government’s continued support of R&D tax relief. It heard evidence from business and sector bodies about its crucial role in supporting and promoting R&D activity in the UK, which in turn contributes to the economy and productivity.
Nonetheless, the report, to which ICAEW’s Tax Faculty provided oral and written evidence, expresses concern at the evidence of escalating loss of revenue, attributable to abuse of R&D relief.
The draft Finance Bill proposes legislative changes to combat this abuse. This includes:
- providing HMRC with more detailed information about the nature of a claim;
- naming any tax adviser involved in preparing claims;
- requiring that claims should be endorsed by a senior officer of the company; and
- pre-notification of an intention to make a claim.
The report considers that legislative reforms of this nature will not be effective in isolation; improvements to HMRC’s compliance capability are also required. This includes a more focused and targeted approach to identifying suspect claims, greater expertise and potentially more resources.
It also flags that the pre-notification of claims is onerous and risks companies being unable to make legitimate claims. Its benefits in countering abuse are also questionable. The committee recommends that the requirement for companies to give notice of claims within six months after their accounting period ends is dropped from the draft Finance Bill 2022–23, before it is introduced into Parliament.
The report questions whether these measures will be effective in reducing the potential for errors in R&D claims. Instead, the committee recommends that HMRC and BEIS improve both guidance and communications to increase understanding of the scheme. In particular, the report was critical of the lack of update to the BEIS guidelines, stating: “It is not appropriate that a document intended to explain innovation has not been revised since 2010.”
To improve certainty for claimants, the report also recommends relaunching the advance assurance process for SMEs. It suggests revisiting the eligibility criteria, including removing the requirement that the company cannot have used the process before. It also requests that HMRC publishes the outcome of a pilot to extend the process to R&D expenditure credit (RDEC) claims by Spring Budget 2023.
Another issue raised in the report is a need for certainty and clarity around HMRC’s “process now, check later” approach. It advocates warning taxpayers that relief may subsequently be recovered if, as a result of later checks, it turns out not to be due.
With regard to other measures in the draft legislation, the report welcomes the extension of the range of qualifying expenditure for which R&D relief is available. For accounting periods beginning on or after 1 April 2023, it will include cloud computing and data licensing costs, and pure mathematics within the scope of the definition for R&D. It notes, however, the amount of time that has elapsed between the first consultations on some of these measures and their introduction. It calls on the draft regulations to be published as soon as possible and notes the limited time available for finalising the draft guidance.
The committee expressed concern that the government’s proposal to refocus R&D relief on R&D activity in the UK may undermine the UK’s competitiveness by causing some UK-based R&D to relocate elsewhere. It calls on the government to consider introducing a form of transitional relief for expenditure on specialised resources that are not currently available in the UK, especially for R&D being carried out under contracts already entered into.
The report notes that the government has recently announced a consultation on potentially merging the two existing schemes for R&D relief into a single scheme. However, it expresses disappointment that the consultation on a possible merger has been limited to design and implementation only. This restricts the scope for views to be expressed on “if” this should happen. The committee recommends that the government should hold an open-ended consultation with stakeholders on this potential change to the relief.
In taking the continuing review of R&D tax reliefs forward, the report recommends that the government should also be transparent about the review’s progress more generally and publish an outline of the areas it is considering as part of the review, no later than the Spring Budget.
ICAEW’s Tax Faculty is recognised internationally as a leading authority and source of expertise on taxation. The faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.