From April 2023, the qualifying expenditure categories will be widened to include data and cloud computing, but the availability of the relief will be restricted to expenditure on UK R&D activities only, in a bid to ensure that the UK remains a competitive location for cutting edge research.
Despite the changes, R&D tax relief remains one of the best tax reliefs available to both loss-making and profit-making companies.
The government has acknowledged that the scope of R&D expenditure needed to be updated to support modern research methods. Qualifying expenditure for both schemes will be expanded to include data and cloud computing costs. For datasets to qualify, they need to have been purchased via a license payment for the purpose of R&D and within a qualifying R&D project.
The company’s staff costs which are incurred in processing the datasets will also be eligible for the relief. For cloud computing costs to be eligible, they also need to be used for qualifying R&D activities. This may for example include costs attributed to computation, data processing, analytics, and software.
This expansion of qualifying expenditure will open up the opportunity of R&D tax relief to many more companies. Despite the advantages of this, for such companies, the process of claiming R&D tax relief may seem daunting and somewhat of a mystery, especially if they have not done so before.
Unfortunately, along with the good news, there comes some bad.
The government has also announced that from April 2023, it would like to refocus reliefs towards innovation in the UK. Whilst exact details of what this means are yet to be released, information on this can be found in this report by HM Treasury. This may mean that the scheme will no longer support expenditure in respect of overseas subcontractors.
In addition, companies who claim for expenditure on EPWs (Externally Provided Workers) will be restricted to EPWs within UK PAYE/NIC.
This implementation is likely to have significant impacts on many innovative UK-based businesses, Including UK tech startups, and disproportionately so to SME businesses. This could be for varying factors from them relying on international supply chains due to cheaper costs, or simply not being to find the skills required to support their development, within the UK itself; For instance, this can refer to collaborating with an overseas scientist in developing a material in which there is little research carried on in the UK.
Research and Development Tax Relief (R&D Tax Relief) helps innovative businesses undertaking R&D-related activity claim a generous corporation tax deduction or a cash refund from HMRC.
Profit-making SMEs can reduce their corporation tax bill or receive a corporation tax repayment for any corporation tax already paid.
Losses generated can be surrendered in exchange for a tax credit/cash refund at 14.5%. The amount available is the lower part of the R&D enhancement and the trading loss, post R&D.
R&D tax relief is available if you have: a) less than 500 staff and b) a turnover of under €100m or a balance sheet total under €86m. If the above doesn’t apply to you, then you may be eligible to claim Research and Development Expenditure Credit (RDEC).
Read more on R&D tax relief for SMEs.
Partner - Corporate and R&D Tax
Corporate and R&D Tax Director
FOR GENERAL INFORMATION ONLY. The information provided in this article is for general information only and does not constitute any specific advice or guidance. Whilst every care has been taken in the preparation of this article, it may contain errors and/or omissions. Always seek professional advice before taking any action. Last updated January 2022.