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UK R&D Tax Incentive Changes to Restrict Costs for Activity Not Physically Conducted in UK

The UK Government has just published draft legislation that includes signification changes to R&D tax incentives, proposed to take effect from 1 April 2023 (noting typical UK tax periods run 1 April to 31 March).

Perhaps one of the biggest proposed changes is the restriction of expenditure for overseas activity:

In some cases, before the current changes, the cost of overseas activity could be claimed under the UK system. Changes propose to focus UK R&D tax incentives on UK R&D activity, meaning that from the 2023/24 tax year, R&D activity will have to be physically located in the UK in order for the costs to be included. UK companies who currently claim R&D costs paid to, for example, overseas group companies or overseas third parties may no longer be able to include these costs in their claims.

There will be some narrow exemptions where factors such as geography, environment, population or other conditions that are not present in the UK are required for research (e.g. deep ocean research) and where there are regulatory or other legal requirements (e.g. clinical trials), which is similar to Australian R&D Tax Incentive legislation regarding Overseas Activity.

The impact of this change will largely depend on the size of the business and the amount of R&D taking place outside the UK.

This new limitation to the UK Incentive may be a factor for companies seeking to determine where to conduct global R&D activity, given that the Australian R&D Tax Incentive is quite generous, particularly for companies with a group turnover of less than $20M.

Additional changes proposed in the draft literature, at a high level, include:

• Extending the scope of qualifying expenditure to include the costs of datasets and cloud computing (and extending the UK Patent Box legislation in the same manner);
• Extending the scope of the definition of R&D to include pure mathematics;
• R&D claims to be made digitally through an online portal, and require more detail regarding the nature of the R&D activities and link to expenditure;
• ‘New’ claimants will be required to notify HMRC in advance; and
• Claims will need to include details of advisors assisting with the claim.

***Note, this update was published by Swanson Reed Australia who are experts in the Australian R&D Tax Incentive. Should you wish to discuss claims for R&D activity in the UK, please reach out to our UK office.