It’s not all doom and gloom. HMRC revealed a consultation is taking place until 13 October 2020 to explore the expansion of qualifying expenditure for Research and Development (R&D) tax relief. As innovation is a key driver of long-term economic growth, we believe the benefits and contribution of R&D activity to our society should not be understated.
The ambitious nature of UK businesses to prioritise and promote their innovative activity, which naturally contains a great degree of uncertainty, requires a robust R&D support regime that matches the risk with due reward.
The current regime rewards Small and Medium Sized Enterprises (SME’s) in the form of a 230% deduction of qualifying R&D costs or a cash credit up to 14.5%. Larger businesses benefit from the Research and Development Expenditure Credit (RDEC), being a payable tax credit of 13% of qualifying R&D costs (an increase of 1% from 1 April 2020, as announced in the Spring budget).
Our recent article suggested a list of tax reliefs that might be on the government’s radar for sacrifice in order to recoup the cost of support for the impacts of COVID-19. But it comes as welcome news that R&D tax relief is instead being considered for update and expansion, in HM Treasury’s words, to: “reflect modern R&D processes”.
The fourth industrial revolution requires the acceptance and understanding of HMRC to fully flourish. Development in technological industries such as cloud computing, the internet of things (IoT), big data, and many more, takes place in a completely different way to manufacturing industries. This consultation shows the government has acknowledged this (although some may say it is long overdue).
Data – there have been calls for more costs incurred in the generation, processing and analysing of datasets used in R&D activities to be treated as qualifying expenditure. Whilst expenditure on consumable items (i.e. those that are used up in the R&D process) qualify for relief, the government wishes to understand which additional dataset costs should also be brought within the scope of qualifying expenditure and how the rules should be amended to achieve this.
Claritas comment – why does this matter? Our experience of working with businesses that develop new software systems or new services is that significant costs are incurred on acquiring data so that the development may be tested before going live. Typically, this data may be of little or no use after the trial has been undertaken, yet there is no relief under the R&D tax regime for the cost of acquiring that data (even though the process being developed clearly does qualify for R&D tax relief). To provide relief for single use data costs would bring the software development business onto a par with manufacturers that are able to claim for the costs of materials that they transform in their R&D projects.
Software (cloud computing) – an ever-growingly important digital asset that may bring great benefits to the R&D activities of a firm. The consultation seeks to have a ‘give and take’ approach by wanting to understand whether some software related costs can be limited without material effects, and whether other software related costs, i.e. ‘cloud computing’ (e.g. storage rental, support and processor running time) should be included within the regime.
Claritas comment – why does this matter? With the increasing popularity of cloud-based computer services, businesses are moving away from acquiring what would be prohibitively expensive software to undertake computational analysis etc. Examples we are seeing include the use of computational fluid dynamics (‘CFD’) clusters to exploit greater processing power to run simulations, running trial software systems on hosted cloud servers to avoid interruption with existing live systems, etc. Currently these activities, although fundamental and directly contributing to the R&D effort, do not qualify. The relief when it was originally introduced could not have envisaged the development of cloud computing and it is time the relief was brought up to date to reflect that.
As is generally the case with any changes, whilst giving with one hand the treasury is looking to take with the other. Consideration is also being given to current eligible costs and whether any of these can now be deemed routine and thus could be sacrificed for the above.
In particular, indirect activities are being reviewed. The consultation will explore views on which indirect activities may be limited or excluded. An example of indirect activities is the time spent interviewing a candidate for the role of undertaking R&D activities in a company. It is understandable that HMRC may be targeting this element of the relief whilst looking to redirect the benefit to direct R&D costs. Generally, indirect activities make up a smaller part of a claim and are harder to quantify, so on the whole we would expect these proposed changes to be welcomed.
As part of this consultation, the government also want to understand views based on experience with R&D tax relief in other tax jurisdictions as well as the impact extending the scope will have on additional investment in R&D activities. This is clearly a sign the government see UK R&D investment as a further way to help the economy in these troubled times.
Although the benefits stemming from this consultation will not be felt until the changes are made through legislation, this is clearly a sensible approach seeking to realign HMRC with the modern world that R&D takes place in.
If your business is affected by the above, we would recommend that you respond to the consultation. Or, if you wish to share your input or discuss anything mentioned above in more detail, we may use that in our own response.
Also, if you are looking for help in putting together a robust R&D claim, please do not hesitate to contact either David Nolan, Matt Hodgson or Sonia Hands.
The world of tax is constantly changing, so keep up to date on all our news, views and opinions
1 October 2020
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