On 21 July 2020 the UK government launched a consultation on extending research and development (R&D) tax credits to costs relating to data and cloud computing. Comments are invited by 13 October 2020.

R&D tax credits support innovative businesses and are intended to drive growth and productivity in the UK.

There are two main types of R&D tax relief available to companies carrying out R&D in the UK. The Research and Development Expenditure Credit (RDEC) is a payable tax credit equivalent to 13% of qualifying R&D costs claimed.

Research and Development tax relief for small and medium enterprises (SMEs) takes the form of a 230% deduction of qualifying R&D costs from taxable profits; or a tax credit of 14.5% of the surrenderable losses of loss-making companies.

The expenditure to be included in a claim for R&D relief must be incurred on staffing costs; consumable or transformable materials such as water, fuel and power; certain types of computer software; payments made to subjects of clinical trials; and in some cases subcontracting costs.

Consultation

The UK government announced in the Spring Budget 2020 that it would hold a consultation on the types of cost that companies can include in their claims for R&D tax credit, and whether these need to be updated to ensure the credits are correctly targeted and in line with modern R&D processes.

Data

It has been suggested that more costs relating to the generation, processing or analysing of datasets could be included within the scope of R&D tax relief. Data can already in some cases be treated as a consumable item used in the course of R&D and related activities.

The consultation is requesting more information from business on how datasets are classified and used in the R&D process. Details are requested on uses of data that contribute to R&D but are currently not eligible for R&D tax relief, with examples.

The consultation also requests information (and examples) on the extent to which datasets used in the R&D process are consumed and the extent to which they retain value.

Software

Currently some software costs in relation to assets developed for internal use are eligible for R&D tax credits.

Some other costs, often including those incurred with software costs when leasing from an external party, are not eligible for R&D tax relief. These costs can relate to cloud computing and the payments could relate to a range of activities such as the use of software, storage rental, support and processor running time. A package may be bought to support a range of business activities in addition to R&D operations.

The UK government is inviting comments, with examples, on whether these wider costs should qualify for R&D relief. The consultation also requests information on experience of claiming R&D tax credits in other jurisdictions in relation to data or cloud computing, and views on whether expanding the scope of R&D relief to these costs would drive additional investments in R&D.

Comments are also invited on any costs that are currently included in R&D relief but that could be considered payments for routine work and excluded from the tax relief.