How will the UK’s expanded R&D tax credit, covering data and cloud computing costs, work?
After consultation with industry groups, academia, and civil society the government announced an expansion of the UK’s R&D tax credit in the November 2021 budget to include:
- support for modern research methods by expanding qualifying expenditure to include data and cloud costs
- more effectively capture the benefits of R&D funded by the reliefs through refocusing support towards innovation in the UK
- target abuse and improve compliance
techUK and members warmly welcomed this announcement to expand the credit to cover data and cloud computing costs, something which we have advocated for since 2017.
This change means that companies will be able to utilise the UK’s R&D support system to cover data driven research, which will support improvements in research, product development and productivity in the UK.
How will the proposed reforms to R&D tax credits be implemented?
HM Treasuy and HMRC released their initial proposals in November 2021 and have carried out consultations with industry on the final policy decisions needed to implement the reforms to the tax credit. The changes are set to be included in the Finance Bill 2022-23, taking effect from April 2023.
Below we set summarise the Treasury’s proposals as well as what we and our members have suggested to get the final policy framework right.
Licence payments for datasets
HMT have proposed to include licence payments of datasets as a qualifying expenditure for R&D tax reliefs. techUK members agree with the Treasury that datasets are as vital an ingredient as any raw materials or labour inputs which are employed in the process of R&D.
These proposals, however come with some restrictions that are set out to make sure that tax credits are claimed only for R&D purposes. For example, companies will not be able to claim the relief if the dataset grants any rights of resale, publishing, sharing or otherwise communicating the raw data within the dataset to a third party.
techUK recommends however not limiting companies' claims on the ability to communicate, share and publish the data for quality assurance and transparency reasons (e.g. where the company share the data so customers can understand the provenance and diligence of the analytics that have been performed), restrictions should be targeted to where the dataset would be sold to a third party for purely commercial reasons.
Cloud computing and software
techUK supports including costs which can be attributed to computation, data processing, analytics and software on the cloud to be claimable for R&D tax reliefs as stated in HMT proposals.
However, we recommend the government to include storage of data to the list of costs outlined above. R&D projects are increasingly including more substantial data to do data-driven R&D, and some members have expressed that in some projects 80% of the costs can be attributable to the storage of data. Excluding storage costs may have unintended consequences, such as skewing activity towards particular types of R&D activity (e.g. those with less storage costs), which is contrary to the scheme's objectives.
Refocusing the reliefs towards innovation in the UK
HMT have set out proposals to more effectively capture the benefits of R&D funded by the reliefs through refocusing support towards innovation in the UK. These proposals are to some extend motivated by the fact that UK companies claimed tax relief on £47.5 billion of R&D expenditure in 2019, but the ONS estimates that businesses only carried out £25.9 billion of privately financed R&D in the UK.
techUK recognises the principle of HMT proposals, however we believe that some of the recommendations stated in the consultation would be challenging to put into action. This is especially considering the current shortages of skills and talent, and the contractual or regulatory requirements that make it mandatory for some companies to conduct some R&D projects outside the UK.
Abuse and compliance
techUK welcomes HMRC’s announcement of allocating additional resources to R&D tax relief compliance and the creation of a new cross-cutting team focussed on abuse. However members are interested on how the measures proposed to “address the root of the problem” would work in practice without overburden companies making R&D claims, and how HMRC will engage with industry to ensure compliance.
techUK and its members will continue to work with HMT and HMRC as they develop the revised guidance and will monitor the implementation of the tax credit when it goes live on the expected date in 2023.
To see techUK’s full set of recommendations on the final design of the policy please click here.
Pablo Derpich
Pablo Derpich is the Policy Manager for Economy and Innovation at techUK.
Neil Ross
As Head of Policy Neil leads techUK's domestic policy development. He regularly engages with UK and Devolved Government Ministers, senior civil servants and Members of the UK’s Parliaments with the aim of supporting government and industry to work together to make the UK the best place to start, scale and develop technology companies.