1. News
  2. HMRC draft guidance on R&D tax relief reform: five ‘devils’ in the detail

HMRC draft guidance on R&D tax relief reform: five ‘devils’ in the detail

Jenny Tragner Director & Head of Policy
Read time:
A magnifying glass inspecting details of R&D tax changes

HMRC has published draft guidance ahead of the implementation of reforms to R&D tax relief on 1 April 2023.

These reforms include bringing pure mathematics research within scope of the reliefs, including data and cloud computing as qualifying costs, restricting expenditure on some overseas R&D activities and a package of measures to target abuse and improve compliance.

Draft legislation for these measures was published on ‘L-day’ in July 2022 and final legislation will be taken forward in the Spring Finance Bill in 2023. The guidance seeks to clarify technical aspects of how the reforms will work in practice and has been informed by stakeholder feedback.

We’ve shared our thoughts elsewhere on the specific measures in the legislation so here we focus on the guidance itself. As is often the case, the devil is in the detail, which is why we’ve flagged five of the finer points to keep in mind come April.

Read our overview of the R&D tax relief changes and their impact.

What is ‘wholly unreasonable’ in relation to Overseas R&D and how does it affect EPWs?

The first section of HMRC’s draft guidance sets out what will qualify as UK expenditure and qualifying overseas expenditure (QOE) in future. Three factors must apply for an activity to be QOE:

  • that conditions necessary for the R&D are not present in the UK
  • that the conditions are present in the location where the R&D is undertaken, and
  • that it would be wholly unreasonable to replicate the conditions in the UK.

The guidance explores in more detail what might constitute ‘wholly unreasonable’ with the use of some interesting examples. One scenario would be where there is a relevant testing facility in the UK, but capacity isn’t available in the timeframe required so the company chooses to test overseas.

This example is extended later to explain one of the excluded factors (cost): if time pressures mean that R&D cannot wait until a new facility is developed in the UK, the theoretical possibility that – at great cost – that facility might be developed to enable activity to take place in the UK, will not prevent the expenditure being QOE.

But the first of our draft guidance ‘devils’ is to be found in the discussion of externally provided workers (EPWs). It is not just overseas EPWs who may be caught and excluded when this legislation is introduced. Whether UK or overseas, companies will first need to check whether the amounts to included for each EPW are subject to UK PAYE and NIC. If not, the EPW expenditure may still qualify if the amount is QOE, as determined by the ‘wholly unreasonable’ test outlined above. For unconnected EPWs, in the case of a UK based EPW operating via a personal service company and extracting funds by way of dividend rather than a PAYE salary, it is likely that expenditure would be excluded.

Find out more about overseas R&D restrictions.

When does a claim notification apply for companies that have previously claimed R&D tax relief?

The section of the draft guidance tackling claim notification includes examples to show when this new requirement will apply. This turns up something new as the guidance refers to calendar years, not accounting periods as many may have assumed. This makes the actual filing dates of R&D tax claims very important for determining whether a notification is required, rather than simply the financial year it applies to.

Another notable detail on notification is confirmation that, if an R&D claim is submitted for a period before the notification date, no separate notification will be required (i.e., if a company files their claim within six months of their year-end, they don’t need to notify).

Find out more about claim notification requirements for R&D tax relief.

 Additional information overload?

Additional information required because of the changes will be submitted via a form to be made available on GOV.UK from April 2023. But in advance of unveiling the form itself, the guidance includes a lengthy list of information fields which will need to be filled out. 

The list includes a separate figure for qualifying indirect activities (QIAs), stipulations on the number of case studies required based on a sliding scale of projects and total expenditure covered, and PAYE scheme references for EPWs (see point number one).

Find out more about the additional information form.

Clouding judgement?

The guidance confirms that for accounting periods starting on or after 1 April 2023, data licence and cloud computing services costs can be qualifying expenditure when employed in activities which directly contribute to the resolution of scientific or technological uncertainty. There are some useful examples of when the general exclusions for reselling and/or publishing data would not apply.

On data licences, the guidance clarifies that data that has been gathered by a business (rather than licenced) is not qualifying expenditure. However, it is worth remembering that the staff costs of gathering the data are likely to qualify under the staff costs category.

Read more on Cloud Computing and R&D tax reform.

HMRC’s R&D claim deletion power – notable by its absence

Even worse than the devil in the detail is the devil that is nowhere to be found in the guidance! In this case, it’s the absence of any reference to HMRC’s new deletion powers. These were included in the draft legislation published on ‘L-day’ last summer and give HMRC the power to remove R&D claims made in error. This falls outside the existing enquiry process, leaving companies with no recourse or right of appeal. More detail is still required here, including examples of when and how this power will be exercised.


ForrestBrown – guiding you through R&D policy

ForrestBrown is the UK’s leading specialist R&D tax consultancy.

We actively engage with R&D consultations and closely monitor and adapt to any updates to policy.

We aim to help create an R&D tax relief incentive that delivers simplicity, certainty, and value for genuinely innovative UK businesses. Speak to us today to benefit from our policy insights.