UK and International Tax news

R&D Tax Credit Consultation

Monday 27th July 2020

HM Treasury has launched a consultation on the scope of qualifying expenditures for R&D tax credits.

The subject of the consultation is the scope of qualifying expenditures for R&D tax credits and, in particular, whether expenditures on data and cloud computing ought to qualify for relief.

The last formal consultation on the scope of qualifying expenditure for R&D was published in November 2010. The Government considers that it is now right to reassess the reliefs to ensure they are well optimised for present and future R&D practices, while continuing to deliver good value for money for the taxpayer.

R&D is defined in s. 1138 CTA 2010 as “activities that fall to be treated as research and development in accordance with generally accepted accounting practice”. This is subject to any regulations made by HMT and the detailed guidance provided by the Department for Business, Energy and Industrial Strategy (BEIS).

With regard to what activities constitute R&D for the purpose of obtaining tax relief, BEIS guidance considers R&D to have taken place “when a project seeks to achieve an advance in science or technology. The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D. Certain qualifying indirect activities related to the project are also R&D. Activities other than qualifying indirect activities which do not directly contribute to the resolution of the project’s scientific or technological uncertainty are not R&D.”

The two principal tax reliefs available to companies undertaking R&D in the UK are:

  • Research and Development Expenditure Credit (RDEC): a payable tax credit (subject to tax) equivalent to 13% of qualifying R&D costs claimed, and
  • Research and Development tax relief for SMEs being a 230% deduction of qualifying R&D costs from a profitable company’s yearly profit, or a tax credit worth up to 14.5% of the surrenderable loss of the loss-making company.

HMT is now seeking views on areas whether particular R&D costs ought to be made eligible for relief, in particular in relation to data and software/cloud computing.

In recent years, some stakeholders have proposed that more of the costs incurred in the generation, processing or analysing of datasets should be eligible for tax relief under the R&D regime. Consumable and transformable materials incurred in R&D activities already qualify for relief. In some cases, despite holding residual value beyond initial R&D projects, data can already be regarded as a consumable item used in the R&D process or related activities. HMT is therefore keen to understand more about how businesses classify and use datasets when undertaking R&D activities.

Software is another prominent asset class in the digital economy, whether it is acquired by companies or developed in-house. At present, some software costs relating to assets developed for internal use qualify for R&D tax credits.  However, there are some other costs, typically incurred alongside software costs where the software is leased from external parties, that are not currently relievable. This is typically called part of ‘cloud computing’ and payments will cover a range of activities, including use of software, storage rental, support and processor running time. Businesses will often purchase packages which are used to facilitate activity across their business operations as well as R&D activity. HMT now wishes to understand whether these wider costs should qualify, alongside traditional software costs.

The consultation runs from 21 July to 13 October 2020.

If you would like more information on the consultation, please contact Keith Rushen on 0207 486 2378.

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