February 2024 / United Kingdom

The UK tax authority, His Majesty's Revenue and Customs (HMRC), has announced a consultation on draft guidance relating to changes to the research and development (R&D) tax reliefs, which will take effect from 1 April 2024.

The legislative changes follow a review of the R&D tax reliefs, which concluded in autumn 2023, when the Autumn Statement announced that the two R&D schemes would be merged.

Reforms have already been initiated to expand the scheme to cover data and cloud costs, to refocus support towards UK innovation, to target tax abuse and improve compliance. These changes and the overseas rules will apply from 1 April 2024.

As a precursor to these reforms, the new draft and updated guidance relates to:

• the restrictions on the extent to which R&D payments (contractor payments or payments to externally provided workers) can qualify for relief if the R&D activity takes place overseas; and
• the new rules for contracted-out R&D.

Full guidance on other changes is expected to be published later in 2024.

The UK tax authority, His Majesty's Revenue and Customs (HMRC) has updated its International Manual. The new guidance INTM485025 has been included in the section of the manual dealing with transfer pricing: operational guidance and relates to evidence gathering.

The new guidance addresses HMRC's application of the six-step process for analysing risk within Chapter I of the OECD Transfer Pricing Guidelines and seeks to clarify its interpretation of the process and how this aligns with a transfer pricing analysis. HMRC notes that "risk assumption is only one of several aspects which are relevant to accurate delineation, and it is important to view this guidance in that context."

The guidance identifies the following risk analysis parts:

• identification of economically significant risks.
• contractual assumption of risk.
• functional analysis to determine which entities control risk.
• consistency between contract, conduct and allocation of risk
• pricing the transaction, taking into account the allocation of risk.

The selection of the most appropriate transfer pricing method and the nature and amount of the reward will depend upon a range of factors. The guidance also notes other aspects and includes examples.

UK has published the Finance Act 2024, enacted on 22 February 2024. The Act provides for the implementation of the measures announced as part of the Autumn Statement 2023.

The Bill was presented to the House of Commons in November 2023. It has now completed its passage through Parliament and with Royal Assent being granted, it now becomes a law.

A link to the Finance Act 2024 can be found here