Changes of R&D Qualifying Expenditure

The world of R&D is always changing. Further to the R&D tax incentive changes that we talked about in our latest blog, there are also changes to the qualifying expenditure that can be included in an R&D tax claim. The key dates for these changes are once again 1/04/2023 and 1/04/2024 and they are coming into force for accounting period starting on or after these dates.

For accounting periods starting on or after 1/04/2023:

1. Data licences and cloud computing services costs can be treated as a qualifying expenditure for R&D tax purposes, provided that these services are used in activities that “directly contribute” to the resolution of the set-out scientific or technological uncertainties. In cases where companies conducting R&D are using data or cloud computing services for both R&D and non-R&D activities and a distinct allocation of associated costs is not available, HMRC is likely to accept a reasonable apportionment of these costs.
2. R&D activities in pure mathematics can be included as qualifying activities in R&D tax claims. This is due to a change in the DSIT (previously BEIS) guidelines, which set out the definition of R&D for tax purposes:

15B. Mathematical techniques are frequently used in science. From April 2023 mathematical advances in themselves are treated as science for the purposes of these Guidelines, whether or not they are advances in representing the nature and behaviour of the physical and material universe.

For accounting periods starting on or after 1/04/2024:

R&D activities conducted outside of the UK will no longer qualify for R&D tax relief (exemptions apply – see below). This change will primarily impact the costs associated with contractors and externally provided workers (EPWs), which must adhere to the following rules to be eligible for R&D tax relief:

• Subcontractors: The main requirement is the location of the activity—it must be within the UK.
• EPWs: Workers must receive their earnings under the PAYE/NIC scheme.

There are exemptions to this new rule, allowing R&D activities conducted outside of the UK to still be eligible for R&D tax relief. These exemptions are based on specific requirements necessary for conducting the R&D activities, such as particular geographical, environmental, and social conditions, or legal and regulatory requirements. HMRC provides examples of R&D activities that require specific environmental conditions, such as deep oceans or high altitudes, or specific locations due to regulatory restrictions. For instance, R&D activities in the motor racing industry may take place during testing sessions. However, regulators for Motorcycle and Motor Car Grand Prix restrict these activities to specific tracks, usually overseas. In such cases, the associated R&D costs would qualify for inclusion in an R&D tax claim.

The latest draft guidance on these changes indicates that the cost of the R&D activity and the availability of workers to carry it out would not qualify as conditions for claiming an exemption from the new rule.

How can Finerva help

At Finerva the R&D claims report we prepare have always included the information which HMRC are now making mandatory. We have done this as it has provided the best support for a successful claim and provides the required backup when your company undergoes investment or acquisition due diligence. This means we are in an excellent position to assist you with all the requirements of the R&D scheme to make a successful claim. If you are seeking professional help regarding your R&D claim, get in touch with our experienced team of advisors or Ben Rule.