Changes ahead for R & D – Are you ready?

R&D tax relief has been a hot topic for a number of years.  Draft legislation published in July both broadens and limits the scope of expenditure for which relief can be claimed for accounting periods beginning on or after April 2023.  So what is going on?

The government set out its intentions in the 2021 Autumn budget and spending review saying that reforms to R&D tax reliefs would ensure that they better support cutting-edge research methods, and that the UK more effectively captures the benefits of R&D funded by the UK taxpayer through the reliefs.

The expansion of categories of expenditure that can be included in an R&D claim is designed to address the changes in the way that R&D is carried out in some sectors.

Expenditure on licenses to access and use a collection of digital data required for usage in a company’s R&D will become qualifying expenditure.  For some businesses this is as vital to their R&D as raw materials and labour inputs are to manufacturing.  The relief is limited to data sets that will be used in qualifying R&D and no relief will be available for data sets that can be resold or will have a lasting value to the business beyond the duration of the R&D.

What you should do. Check the details of any licence agreements for access to data sets to ensure that there are no terms included which might render the costs ineligible. Does the agreement include rights to resell the data or to share it with a third party? It can be hard to estimate how long an R&D project will last, but if the licence gives rights to use the data set for a period that exceeds the expected life-span of the R&D project, this could present difficulties in justifying it as qualifying expenditure to HMRC.

Cloud computing costs are also to be included as qualifying expenses. Bear in mind this will not be all the cloud computing costs of the business, but will need to be those attributable to data processing and analytics specifically contributing to the R&D. If your business has a cloud package that covers all your data storage and access, now is the time to consider how you might go about identifying the element that relates to R&D and could be included in a claim.

A further addition to the suite of qualifying costs for R&D will be pure mathematics.  Whilst it is believed this will be particularly welcome to sectors developing artificial intelligence and robotics, there is still uncertainty regarding how HMRC will define pure mathematics for these purposes.  However, if your business has costs that could be defined as pure mathematics and relate to R&D, now is the time to quantify these and these and ensure that they are properly tracked and recorded so that when the final rules are available, it will be possible to quickly identify what can qualify.

The team at Wright Vigar will help you make the most out of innovation and ensure you are claiming back every penny you can from the tax man. Find out more here