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Changes to R&D tax credits explained – what do changes mean for your businesses?

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Last Autumn, the Chancellor, Rishi Sunak unveiled the Spending Review for 2021. Amongst the items announced was the decision to review Research and Development (R&D) Tax Credits Scheme to help stimulate further private sector innovation in the UK. The Chancellor stressed the government’s belief that R&D is essential to stimulate innovation and long-term prosperity for the country, which underpinned the decision to amend the scheme. But what are the changes and how will they affect you?

Key Changes to the R&D Scheme:

Increased opportunities

There are now more opportunities for companies to claim R&D Tax Credits on a wider range of activities and projects, with data and cloud computing costs added to the list of activities that can be claimed on. This will impact most, if not all R&D projects as they are essential components of modern-day research, which is great news for businesses.

Location

Secondly, the government are aiming to encourage UK-based R&D with the changes effectively banning any claims made on overseas costs, therefore, ensuring that cost savings are limited to UK businesses rather than subsidising overseas companies. This sounds beneficial to the tax payer, but it might negatively affect SMEs who rely on cheaper resources for example, foreign staff or professionals with the right skill set who might not be available in the UK.

Accountability

HMRC has stepped up the claim process in a bid to combat fraud. One of the key changes is that someone in the senior leadership team will have to endorse each claim submitted, which will result in a lot of extra work in some cases as internal teams will need to fully understand the extensive legislation whilst ensuring the claim is robust before signing off.

HMRC is also asking for advance notification that a claim will be submitted, and that detailed background information is provided for each separate activity and cost. Rishi Sunak reiterated that more tax advisers would be appointed in an attempt to stop unlawful claims. There are also likely to be more enquiries and challenges, so it is vital that companies fill out their R&D costs accurately with as much supporting documentation as possible to avoid this.

What should you do if you are affected by these changes?

Whilst there is a lot of positive changes and opportunities for businesses to save a great deal on corporation tax, we would strongly advise anyone who is affected by these changes to appoint a professional to ensure everything is filled out correctly. Tax investigations by HMRC are costly in terms of time and pressure. At Mercer & Hole, our corporate and business tax team can support you and your leadership team to ensure you haven’t missed any opportunities and that you comply fully with the new regulations.

Mark Pashley corporate and business tax partner

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