14 October 2022
Proposed changes to R&D tax relief could be the biggest to the regime since its inception in 2000. Draft legislation was published earlier this year that aims to ensure that relief is properly targeted and meets its policy aims. Notably, it includes measures to reduce fraud and perceived misuse of the regime.
One of the more generous proposals would allow data and cloud computing costs to qualify for enhanced relief. With the UK technology sector going from strength to strength (government figures show that investment more than doubled in 2021), it is important that the tax system continues to support R&D activities.
The current position
There are concerns that the R&D tax relief regime has failed to keep up with the way modern technology businesses (fintech, insurtech, edtech etc) function. Data and cloud computing are integral to companies’ development goals but, despite growing costs, they are currently ineligible for enhanced relief because they do not fit into any of the prescribed categories of qualifying expenditure specified in the legislation.
The IT-related costs that can qualify are generally limited to software costs, though enhanced capital allowances may be available for hardware. The narrowly defined criteria for qualifying expenditure don’t reflect the technology that now underpins R&D activities, which are increasingly reliant on cloud computing and data analysis.
Computer-based technology firms are therefore at a distinct disadvantage to other sectors, such as manufacturing, because items that are physically consumed in R&D have always qualified.
How it’s changing
For accounting periods beginning on or after April 2023, the scope of qualifying expenditure will be increased to include data and cloud computing costs.
The addition of data costs will allow relief to be obtained for the costs of licencing data sets, which are a vital tool used in R&D projects by companies in a variety of sectors, including financial services, insurance, and health technologies. However, the eligibility of these costs has been restricted to prevent companies from claiming for data that may be resold, published or shared. This caveat is designed to ensure that only data used solely for R&D purposes is included in the claim.
The definition of cloud computing costs includes:
- costs of data storage;
- operating systems;
- software platforms; and
- hardware facilities.
Cloud-based services, such as AWS, Microsoft Azure and Google Cloud, are now used by a huge range of companies to provide processing capability and as tools that allow them to function effectively. Technology firms will welcome the change to the R&D tax relief legislation that reflects this.
What does this mean?
The technology sector has become increasingly important to the UK, and the government will hope that this trend continues as it promotes a high-skill, high-wage, technology-focused economy. Broadening the scope of eligible costs should help to ensure that the R&D tax relief regime continues to support that objective, and many industry observers would argue that these changes are long overdue.
Companies should start to consider the impact on their tax position, in particular by:
- closely evaluating data licenses to assess their eligibility against the new legislative criteria; and
- reviewing their cloud computing costs to determine the extent to which they qualify for R&D tax relief.
If you would like to discuss these changes further, please speak to your usual contact in the specialist Innovation Reliefs group at RSM or James Tetley.