The UK Chancellor announced unexpected new measures in the 2023 Spring Budget which accelerated the requirement to prepare significant documentation to support R&D claims, as well as analyse costs on a project basis. Businesses will consequently have to adapt their R&D claim processes, and provide more documentation to meet HMRC’s requirements.
For claims submitted from 1 August 2023, claimants will be required to provide contact details for the senior officer of the company who is taking responsibility for the R&D claim, as well as any agent who has been involved. These changes are designed to encourage businesses to take responsibility for their claims, and are part of a package of measures aimed at modernising this incentive, to ensure it is appropriately targeted and not open to abuse.
Businesses will need to think carefully about these requirements and how best to incorporate them into their claim preparation. It will be necessary to factor in sufficient time to prepare the necessary documentation, which requires up to 10 project descriptions (depending on the project profile) to be submitted in advance of the tax return that includes the claim in question. Companies who do not currently calculate their claim on a ‘project’ basis will need to make the necessary calculations. It will also be important to calculate qualifying indirect costs accurately, to ensure the correct distinction is made between direct and indirect activities. These requirements are likely to increase the administration burden when- compiling R&D claims.
In addition, some companies may be required to pre-notify their intention to make a claim with a pre-notification deadline of six months after the end of the period of account. This is applicable for accounting periods commencing on or after 1 April 2023.
This would be applicable to:
- New claimants.
- Companies who have not made a claim in the three years preceding the pre-notification deadline.
- Companies that have claimed for the previous accounting period (their first claim), but did not submit that claim until after the last date of the claim notification period.
Claims submitted after the deadline may be deemed invalid. This requirement is on an individual claimant basis, so if a new group company is established and undertakes R&D as a result of a restructuring, for example, it will need to meet the pre-notification requirements, even if the group has made R&D claims for many years. Definitely a point for businesses to add to their year-end checklists.
The increase in the Research & Development Expenditure Credit (RDEC) rate from 13% to 20% from 1 April 2023 (cash value 15%) should mean that the RDEC remains a valuable relief for many businesses. Meanwhile, the cash value for Small and Medium Sized enterprises (SMEs) is reducing from up to 33% to between 18.6% and 27% from 1 April 2023.
Unfortunately, these developments are not the end of uncertainty for R&D claimants. More changes are on the horizon, with HM Treasury currently considering feedback on their recent consultation into a single merged R&D scheme, and we are expecting draft legislation for consultation to be issued on 18 July.
We hope the legislation will deliver simplification and certainty for R&D claimants whilst driving increased benefits in a manageable way. Doing so will allow businesses to plan for future investment in innovation and allow R&D to drive economic growth as the UK Government has intended.
PwC can help businesses navigate the new mandatory documentation requirements, whether in relation to in-house prepared R&D claims or by providing a complete out-source of the R&D claim preparation. To discuss any issues relating to R&D incentives, please contact us directly, or speak to your usual PwC contact.
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