The government’s recently published draft legislation on reforms to the R&D tax relief scheme includes an addition that reflects a real intent to move with the times, modernise the scheme and support innovators and the technology sector moving forward.
What does this mean materially? The inclusion of cloud computing services and data as qualifying R&D expenditures for both tax relief schemes (RDEC and SME), as well as the incorporation of advancements in pure mathematics in the definition of qualifying R&D activities.
Data, cloud computing and pure mathematics: a brief history
Following the launch of a consultation in spring 2020 by HM Treasury, the government listened to feedback and announced in the 2021 Autumn Budget that the definition of qualifying R&D expenditure would expand to include data and cloud computing.
In the 2022 Spring Statement, they revealed that the definition of pure mathematics would also be included, with businesses able to claim for these additional costs from April 2023.
What does the addition of data, cloud computing and pure mathematics as qualifying costs mean moving forward?
The new qualifying R&D expenditure will give businesses the chance to claim for more when the regulation takes effect on 1 April 2023. Let’s look at each of the qualifying costs in further depth to see how they may help companies build their future claim value.
Cloud computing costs
Costs related to cloud computing, data processing, data analysis and software development may now be claimed for R&D tax reliefs. It’s a strong move from HMRC: the majority of IT-related sectors already know that the cloud computing costs of running cloud technologies like machine learning (ML) and AI solutions, amongst other things, are not insignificant. It requires a lot of power to create, maintain, run and store these types of software.
Data and Cloud computing R&D expenditure will be especially beneficial for small to medium businesses in the tech sector. They often have high costs associated with cloud computing, which can often act as a barrier to business growth. Being able to reclaim some of these expenses will help companies redirect funds to other areas of R&D or put an additional budget behind cloud computing.
The decision to include licence payments of datasets as qualifying expenditure for R&D tax relief is a welcomed addition and reflects a modernisation of the scheme.
At EmpowerRD, we share the same view as the Treasury: datasets or data storage are as critical to R&D as raw materials and labour input. And it’s great that detailed guidance has already been provided on which specific dataset costs will be qualifying.
Essentially, expenditure on datasets via licenses used directly for R&D in a qualifying R&D project will qualify for relief. However, in a situation where an access agreement covers multiple datasets, of which some are used for non-R&D purposes, costs must be apportioned.
Companies will not be able to claim relief on the cost of datasets that can be either resold or have a lasting value to the business beyond the scope of the project. Specifically, costs relating to a licence agreement which grants the following will not qualify:
- Any rights of resale over the data.
- The claimant has the right to publish, share or otherwise communicate the raw data within the dataset to a third party.
- Any ongoing rights of use, beyond the expected term of the R&D project being undertaken by the claimant.
The lack of a definition of pure mathematics from HMRC in the eligibility guide for qualifying R&D expenditure has caused problems for many companies over the years. For instance, an R&D tax relief claim for a business whose R&D is mostly mathematical has always faced a higher chance of an enquiry from HMRC; it’s also put off some businesses from claiming altogether.
Because of the mathematical nature of their R&D, industries that previously faced increased risk will benefit significantly from the introduction of a definition of pure mathematics. There is no detailed guidance yet on how to assess the eligibility of pure mathematics, which is why we look forward to HMRC publishing further information in the coming months.
The changes are good
For a long time the exclusion of data, cloud computing and pure mathematics from the R&D tax credits scheme have been an issue for developing industries in the UK, such as Artificial Intelligence (AI), Quantum Computing and Robotics. It’s also been a problem for more established sectors like manufacturing.
The cost of cloud computing has always been significant and the lack of clarity around pure mathematics has put certain companies at a much higher risk of an enquiry from HRMC.
Therefore, the introduction of data, cloud computing and pure mathematics are welcomed by us at EmpowerRD. They’ve always been needed for companies to cover data driven research and develop new solutions and it’s great to see this acknowledged.