The Government’s consultation on expanding the scope of qualifying R&D expenditure, which closed on 13 October, seeks to address whether costs relating to data and cloud computing should qualify for tax relief.
We are encouraged by the proposal to expand the qualifying categories to include costs of data sets and cloud computing, as this will better reflect the new ways expenditure is incurred by many innovative businesses in the digital sector.
The use of data is becoming an increasingly fundamental element of R&D activity, and under the current legislation does not attract relief, either through the R&D expenditure credit (RDEC) or small and medium-sized enterprise (SME) scheme.
In order for the R&D tax relief schemes to effectively incentivise spending on qualifying activities, we recommend that the definition of consumable costs and software should be expanded to reflect the changing nature of R&D activities appropriately. However, the suggestion that data should be consumed or transformed in the course of the R&D activities in order to qualify for relief does not necessarily fit with the use of data in the R&D process. As such, we would suggest that a more tailored, specific approach be considered for data sets and have called for a new and specific legislative sub-category of qualifying costs to capture this.
The most significant development in software-related costs since the R&D tax relief legislation was introduced is the level of expenditure now incurred on cloud computing and hosting across businesses as the standard way of managing IT systems. We suggest that the scope of qualifying software costs should be expanded to specifically allow cloud computing costs to qualify for R&D tax relief.
We understand that the Government wishes to manage the net cost of any changes to the R&D tax relief legislation, however, we also believe that other businesses that carry out R&D in a physical rather than virtual setting frequently incur costs directly connected with qualifying R&D activities, which are not eligible for relief under the current legislation, for example costs of hiring equipment and premises. In our view, to encourage such businesses to invest in future R&D activities, such costs should qualify for relief. It would therefore be appropriate to consider expanding the categories of expenditure in respect of relief available.
Research and development is crucial for the UK's long-term economic growth, and plays a fundamental role in the Government’s commitment to supporting strong and sustainable growth in productivity. In the current climate, it is even more important that the UK has a tax regime that is internationally competitive and supports future investment in innovation.
We are encouraged that the Government has sought to consult widely, and hope that the feedback provided by RSM and others is carefully considered.