Month: February 2022

by Pronovotech Pronovotech No Comments

Our View on the November 2021 R&D Tax Reliefs Report

Dear Sirs

We welcome the opportunity to respond to the Government’s proposals announced in the R&D Tax Reliefs Report published in November 2021. We are a firm of specialist advisers on R&D tax schemes founded in 2006 and a member of the R&D Consultative Committee.

We present our responses to the various aspects in the report below.


1) Data and Cloud Computing Costs

As a widening of the range of costs qualifying under the R&D tax schemes, we see the introduction of relief for datasets as a positive benefit to a number of companies in different sectors.

However, we are disappointed with the omission of hosting costs from the scope of allowable cloud computing expenditure.

To many software development companies, the costs incurred to access online hosting environments for development work are considerable – as well as essential to the R&D project – and our clients are often perplexed at the exclusion of this element from their claims.

In contrast, the kinds of items within the proposed categories are, in our experience, a much less common aspect and thus likely to be of little benefit.


2) Refocusing the Reliefs Towards Innovation in the UK

It is not difficult to understand the policy thinking behind the proposals to remove relief for overseas subcontract costs and those relating to Externally Provided Workers (EPWs) outside the UK.

The general public is likely to hold the view that the UK R&D tax benefit should reward and incentivise innovative activity taking place in this country.

Nevertheless, many claimant companies will see their claims reduce significantly where they currently outsource parts of their project work to overseas suppliers, whether on a subcontract basis or to supplement the in-house team with a temporary workforce. Although cost is undoubtedly a factor in such decisions, access to the appropriate skills is often another.

An alternative to abolishing relief entirely in such cases might be to offer different levels of relief or credit. For instance, for SMEs the additional deduction might be higher for UK costs whilst for large companies an adjustment to the amount of qualifying cost could be made such that UK subcontractors or staff providers are favoured.


3) Abuse and Compliance

For some years it has been a concern amongst R&D specialists that reputational damage to the R&D schemes could arise because of questionable practices amongst some entrants to the field.

Regulatory measures such as Anti-Money Laundering supervision and voluntary codes of practice such as Professional Conduct in Relation to Taxation (PCRT) have unfortunately done little to stem the tide. We therefore welcome a drive to improve compliance and tackling abuse.

The requirement to file claims electronically is a sensible move and only surprising that it has not been in place sooner. We have been filing all claims this way since 2010. All our claims are accompanied by a report setting out the types of expenditure included as well as the how the projects meet the criteria in the Guidelines, so we also welcome this information being required. We would hope that these measures will set a minimum disclosure level that claimants and their advisers aim to meet.

Our standard claim practice is to explain which personnel from the claimant company have been involved in preparing the claim, particularly on the project technical side, so we believe it makes sense to introduce a statutory sign-off. There has been concern that some advisers file claims without any review or ownership by the company’s technical lead so it is to be hoped that the proposal will crack down on such practice.

We are concerned however that the notification requirement may penalise both start-up companies and those commencing an R&D project for the first time.

We imagine that the objective may be to clamp down on “sweep-up” claims for first-time claimants in relation to prior periods still within the time limit. A fairer way would be for notification prior to the end of the relevant accounting period itself or even within the standard 12-month return filing deadline.

We would also caution against taking the view that a commission or contingent fee basis is necessarily a potential indicator of abuse.

Such a fee basis is common in the sector and whilst we have always taken the view that the R&D schemes are there to benefit innovative companies rather than their advisers, a percentage fee basis is often a fair method of assessing the work involved whilst providing automatic value for money.

Once again we thank HM Treasury and HMRC for the opportunity to provide input to future thinking on the R&D tax schemes. If there are any responses to which you would like further clarification, please contact us.