Issue 29 | Page 62

FINANCE
PICTURE : TOM BANKS

Ready for change ?

How innovation - and new R & D tax rules - can pay dividends
Stephen Harris , associate director at Azets in the North-East , looks at the potential impact of changes to R & D tax relief ...

Investment in research and development ( R & D ) is more important than ever to North-East businesses as they recover from the pandemic . Many companies will look at options of how they can positively impact their cashflow . A key consideration for companies should be R & D tax relief – a generous relief for companies that continue to invest in innovative activities .

And there are R & D reforms coming into effect from April 1 , 2023 , announced in the chancellor ’ s Autumn Budget in 2021 , which businesses in the region need to be aware of .
What is R & D tax relief ? Broadly , to qualify for R & D tax relief , the project must seek to achieve an advance in science or technology through the resolution of scientific or technological uncertainties .
The R & D definition can make companies think that the activities they undertake are not qualifying . However , in Azets ’ experience , clients often do not realise the potential for R & D in their work .
For companies that qualify , R & D tax relief can result in significant tax savings or cash repayments . The benefit of R & D can vary considerably depending on how the relief is applied .
Careful planning is paramount to ensure that this R & D benefit is utilised in the most efficient manner .
There is a misconception that R & D tax relief is only beneficial to profitable companies . However , loss-making companies have a range of options too , including the potential for cash repayments . The rate of corporate tax is rising to 25 per cent in 2023 , making the relief even more valuable .
R & D tax reforms - April 1 , 2023 The R & D reforms summarised below will come into effect from April 1 , 2023 . These changes support modern research methods by expanding qualifying expenditure to include data and cloud costs and to capture more effectively the benefits of R & D funded by the reliefs , through refocusing support towards innovation in the UK .
Data and cloud computing costs Qualifying expenditure for both reliefs will be expanded to include data and cloud computing costs . This modernisation will ensure the reliefs better incentivise cutting-edge R & D methods which rely on vast quantities of data that are analysed and processed via the cloud . The following new categories of expenditure will be brought in : > Licence payments for datasets . > Cloud computing costs that can be attributed to computation , data processing and software .
> Costs in relation to servers or storage will not qualify .
Advice - Azets ’ Stephen Harris .
Refocusing the relief towards innovation in the UK R & D qualifying expenditure will be refocused on domestic expenditure through the prohibition of : > Overseas subcontractor costs ( including contributions for independent R & D of an overseas qualifying body ); and > Overseas externally provided workers .
Abuse and compliance The government has set itself an ambitious target to raise total investment in R & D to 2.4 per cent of UK GDP by 2027 . It ’ s important that businesses keep investing in R & D but take the appropriate steps to ensure they do not inadvertently
or otherwise claim fraudulently . The government will make the following changes to tighten controls to better combat rogue advisors and fraudulent claims . > All claims to the R & D reliefs – either for a deduction or a tax credit – will in future have to be made digitally ( except from those companies exempt from the requirement to deliver a company tax return online ).
> Digital claims will in future require more detail – for example , on what expenditure the claim covers , the nature of the advance sought , the field of science or technology , the uncertainties overcome .
> Each claim will need to be endorsed by a named senior officer of the company . Companies will need to inform HMRC , in advance , that they plan to make a claim . In summary , planning around R & D tax relief is crucial to achieve the best outcome .
For further information , please contact
Stephen Harris , associate tax director at Azets in the North-East
stephen . harris @ azets . co . uk azets . co . uk
62 | Tees Business