Earlier this year, HMRC announced their intention to make key proposed changes to R&D tax credits beginning April 2023, affecting the tech & SaaS industry.
The proposed changes to R&D tax relief for 2023 around cloud computing and data
In an attempt to acknowledge and support the changing landscape of the technology sector here in the UK, HMRC announced a wider scope to R&D tax reliefs. From April 2023, tech businesses who use cloud computing, data and pure maths (when training data sets in Machine Learning or Artificial Intelligence) can claim for tax reliefs to reclaim for expenditure in these areas.
However, this new wider scope could mean deeper scrutiny from HMRC to prevent misuse or errors in R&D claims, so being compliant and careful in your claim form preparations is key.
The upcoming changes for overseas R&D
There’s also legislation coming into effect in April 2023 that could impact tech and SaaS businesses which relates to R&D expenditure and payments to externally provided workers (EPWs). In order to claim for subcontracted work, all activity will soon need to be performed in the UK and any EPW will need to be subject to UK PAYE. For some, that could result in a reduction to what’s allowable within a claim.
With many tech and SaaS businesses reliant on overseas subcontracted workers, this will be a significant shift and one that will need careful consideration on how their ongoing workforce is structured.
Specialist industry insight
Speaking to Jenny Tragner, Director and Head of Policy from Forrest Brown, R&D tax specialists, she explained in better detail how the new proposed changes to EPWs, coupled with the upcoming wider scope of R&D tax relief for tech companies will actually affect tech businesses in practice.
“The proposed changes will come as a real challenge for a number of innovative technology companies, who are facing global competition for specialist talent. It has the potential to hamper the UK’s ability to be part of global R&D programmes and could lead to a talent drain away from the UK over time. The proposed changes to relief for overseas R&D assume a commercial reflexivity to pivot towards using UK-based suppliers or resources, but companies who need to access a global skills base are unlikely to be able to do this.
The inclusion of pure mathematical advances and licence payments for datasets used in R&D will unlock value in some cases. However, it is likely that the addition of cloud computing costs will have the broadest impact on R&D tax relief claims for companies working at the frontiers of these sectors.”
What steps should businesses be taking now in order to prepare for the changes ahead?
Jenny offered this advice:
“The upcoming changes to the legislation mean that it is important to ensure you understand how you may be affected and what steps you can take to prepare for implementation.
With regards to the proposed changes to widening the scope of relief for data, cloud and pure maths, it is likely that HMRC will pay particular attention to these new rules, as the scope for error or abuse is higher where there isn’t established guidance and mutual understanding of interpretation. When tackling a first R&D claim for data, cloud or pure maths, a good first step would be to think about record keeping. For example, consider splitting financial records for cloud computing costs into amounts relating to R&D and normal day-to-day requirements. This could make it much easier to calculate your claim and provide you with robust evidence should HMRC review it.”
The bottom line is to be prepared and know just how the upcoming changes could affect your company and help shape your business plan for 2023.
Are you clear on how you will be impacted by these changes?