By Ben Chernoff
Despite being some of the most innovative companies in the UK, much of the costs incurred by technology firms have not qualified for research and development (R&D) tax credits.
However, this could be due to change from April 2023, as the Government prepares to expand its qualifying costs criteria to cover data and cloud computing services.
Announced in one of last year’s Budgets, the move should open up a wider pool of tax relief to tech companies and encourage.
However, alongside the widening of qualifying cost criteria, the new measures come with a sting in the tail in the form of new anti-abuse rules and the disqualification of outsourced overseas R&D costs.
Cloud computing and data
Businesses have been unable to claim for the costs of cloud computing and data use. This has hampered some of the UK’s most innovative tech companies by excluding them from the tax benefits of the R&D credit scheme.
Under the Bill, businesses will be able to include the costs of purchasing data for R&D projects or using cloud computing services.
However, HM Revenue & Customs (HMRC) is still expected to provide clarity on the issues of usage and residual values in its upcoming guidance.
Amongst the other issues to consider is identifying cloud costs that relate to an R&D project. Many businesses use the same cloud services throughout their operations, so apportioning specific costs to R&D may be challenging.
Other qualifying costs for cloud computing costs may also be an issue, as it has been revealed that the costs of ‘data storage’ will not be allowed.
There has been growing concern that the R&D tax relief system is open to abuse and so the new measures will include compliance procedures to deter speculative or fraudulent claims. This will include:
- An entirely digital claims system
- Additional details to be submitted with all claims
- Requirements for a named senior officer of the company to endorse each claim
- Companies made to notify HMRC, in advance, of their intentions to submit a claim
- Details of any agent who has advised the company on compiling the claim.
HMRC will also be given new powers and enforcement action to tackle R&D tax advisers. It is thought that alongside these measures, HMRC will invest further resources into conducting additional risk profiling and scrutiny of R&D tax relief claims.
Outsourced overseas R&D
Under the new rules, the costs of overseas workers will not qualify for UK R&D relief, where incurred after April 2023.
The Government has indicated that it does not want to introduce a rule that discriminates against businesses that cannot practically carry out research in the UK.
At the moment, it is understood that a list of exemptions is being worked on to ensure that British businesses can still access overseas expertise without being penalised.
The exemptions will most likely be tied to environmental, geographical, legal or regulatory reasons. There may also be an exemption for the use of niche and/or specialist skills, such as obtaining advice from world-leading experts a particular field.
The Government also needs to consider the international structures and connections of businesses carrying out R&D.
If a blanket ban was imposed, UK groups with overseas subsidiaries conducting work on a UK project may not be able to make a claim, despite the innovation still benefiting the main UK parent company.
Further clarity on overseas outsourced R&D costs should be revealed in the final Bill, so businesses that are likely to be affected by this rule need to keep an eye on developments in this area.
Need help with R&D tax credits?
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