Publish Date

Jul 22, 2022

Draft Legislation for Reforms to R&D Relief is Released – Appreciable Improvements, But Some Uncertainty Remains

A&M Tax Advisor Update

Following the consultation on the future of the R&D regime, the government published draft legislation on 20 July (accessible here). This introduces a few significant changes, largely clearly drafted and in line with expectations, though not without consequence for many claimants and R&D advisers. The changes will have effect for periods starting on or after 1 April 2023.

Besides the previously communicated changes to qualifying expenditure, there will be an increase in the administrative burden associated with R&D claims. Specific details on the additional claim information HMRC will require is not yet available, and we hope that the administrative cost is a small price to pay for HMRC’s gain in ability to enforce compliance. As this additional information will be set out in secondary legislation, there may not be an opportunity to comment on the changes before they come into effect.

An increase in the RDEC rate is hoped for ahead of the potential corporate tax rate rise, and also given the comments in Spring Statement 2022 that the government would consider increasing the generosity of RDEC. We weren’t expecting this to be included in the draft legislation, though hope that the government delivers on its intention.

We discuss the significant points arising from the draft legislation below. If you have any questions on the impact of the changes, please contact our UK R&D tax specialists: Paul Wong (Senior Director) or Rob Lamb (Director). The government has requested comments by 14 September: A&M will be responding, and we would also be glad to assist any companies wishing to submit their own responses.

Focus on UK activities

The restrictions on claiming R&D activities taking place outside the UK are generally clearly drafted. While A&M’s view remains that these are too restrictive, and will exclude some R&D that genuinely benefits the UK, the legislation appears to be in line with earlier communications, including a small concession for R&D activities that can only take place outside the UK.

The geographic restrictions do not appear to cover expenditure on software: this may encourage a degree of creativity on the part of some claimants to investigate whether contracts for overseas subcontractors or EPWs engaged in software development can be redrawn as purchase of software, and still be claimable to some extent. We doubt that this will be commercially practicable, and the legislation as drafted allows the more likely scenario of a company genuinely paying an overseas company for software used in UK R&D.

Extension to include data and cloud computing

There are no surprises in this area: the legislation is essentially as expected, and is a positive change. The limitations on claiming when the data or computing services have further uses is loosely analogous to the rules on consumables, and therefore may similarly encourage a creative reading of the restrictions in some circumstances, but should broadly be effective. Excluding claims for qualifying indirect activities conflicts slightly with the existing eligibility of software in these circumstances, though the reasoning for doing so is clear.

Requirement to notify intention to claim

By introducing a requirement for new claimants to notify HMRC of an intention to claim within six months of the relevant period end, the government hopes to tackle abuse. It isn’t obvious how a need to notify will deter abusive claims, though this may become clearer once the information to be supplied with the notification is set out: this vital detail will be included in secondary legislation, and may not be open to comments. If notification requires only a box-tick, a “pragmatic” approach could be for all companies to notify even if they had no current intention to claim. In any case, if required they could ultimately submit an R&D claim for £0. Of course, if extensive details of the nature of the claim are required in the notification, this won’t be possible.

There may be limited cases where this new requirement has unintended consequences. For example, if one company in a group has historically made claims, it would have no need to notify in subsequent periods. However, if a change in staffing or recharging arrangements occurs, a claim may need to be made in a different group company. If this requirement isn’t spotted in time to notify, the deadline will pass, and the group will miss out on an otherwise valid R&D claim. We recommend considering whether corporate tax groups could submit one notification to include all UK group companies.

A minor administrative hiccup could arise in the event that only a company and its tax agent are able to notify. R&D advisers are often not the tax agent for their clients. There will therefore be a dependency on claim notification being made correctly, requiring coordination between new claimants and their advisers to ensure that this happens. Further, in particular for start-ups, notification requires awareness of the potential to claim. Awareness of the R&D regime is much better now than a few years ago, though there will undoubtedly be some companies that miss out on the ability to claim thanks to this measure.

In addition, first-time claimants will only be able to claim for a single accounting period, and won’t have the ability to claim for earlier periods where the time limit to submit a claim is still open. This may deter small organisations from claiming, as the benefit may no longer be commensurate with the effort and risk associated with setting up the claim process.

Information required to be submitted with claims

The draft legislation includes a provision for HMRC to require information to be filed with a claim, though (as for the claim notification) the detail as to what specifically this will involve is not set out. The accompanying policy paper says that the information will include a description of the R&D undertaken and a breakdown of qualifying costs (any responsible adviser will generally be providing these in some form anyway), plus details of any agent who has advised on the R&D claim and space for sign off from a senior officer of the company (both requirements as expected given earlier discussions).

We await with interest how HMRC will specify the requirements for documenting R&D activities. The current position that HMRC will accept documentation of a representative selection of projects is a pragmatic approach, and we hope that the new requirements are not excessive. This could represent a move towards models in other jurisdictions (e.g. Canada and Australia) that have prescriptive claims processes and even word counts for project documentation. Similarly, we hope the required granularity of the breakdown of qualifying costs is reasonable: for example, including lists of hundreds of salaries and eligibility percentages with larger claims is unlikely to add any value.

It is unclear whether the reference to “agent” in the policy paper will capture all advisers. Unless R&D advisers will all be required to register as agents for their clients, or some broader definition of “agent” is introduced for these purposes, it is not unforeseeable that some advisers who may not wish to be held accountable for their advice determine that their relationship with the claimant falls short of agency.

Addressing anomalies

The measures to address anomalies are generally welcome, including the concession that where a claimant wrongly determines itself to be SME, it can resubmit a claim under the RDEC legislation, even outside the time limit. Of course, permitting a claimant that incorrectly determines itself to be large to resubmit under the SME legislation would appear to be fair and equitable, though is not included.

The amendment to the rules around change in status from SME to large because of changes elsewhere in a corporate group are welcome (even if long overdue), as are the provisions to allow companies to claim when not a going concern because of transfer of trade.

Patent Box interaction

The restrictions to claiming expenditure on overseas R&D would have impacted the amount of “in-house” R&D for the purposes of the Patent Box nexus fraction. However, the draft legislation provides that overseas expenditure continues to be in scope, and will also allow the expanded definition of software costs to be included. The overall effect for those who benefit from Patent Box is therefore marginal, but positive.


Overall, these changes are positive, and make steps towards the government’s goal of a better-functioning R&D incentives regime. A significant question mark remains around the specific information that HMRC will require when notifying the intention to claim, and when filing the claim, especially if there is no ability to comment on the practicalities of the secondary legislation. Pragmatic measures will be needed to ensure the new legislation works as intended and the new regime promotes higher R&D investment to drive economic growth in the UK.