What is R&D Tax Relief?
Over 20 years ago, the UK government implemented a tax incentive scheme for innovative businesses, to incentivise scientific and technical advancements.
This initiative is called Research and Development Tax Relief (R&D Tax Relief), and it allows UK companies that are bringing a new product, process, or service to market (or enhancing existing ones) to fuel cashflow by filing an R&D Tax Credit claim every financial year.
How do R and D Tax Credits work?
R&D Tax Relief is accessed through filing R and D Tax Credits to HMRC.
R and D Tax Credits allow claimants to recover up to 27% of the yearly costs that they incurred whilst conducting qualifying R&D activities.* In summary, loss-making SMEs will receive their R and D Tax Relief in cash, and profitable businesses and large corporations receive R and D Tax Credits in the form a Corporation Tax (CT) deduction.
New areas of R&D expenditure to qualify for R&D Tax Relief from April 2023
Today, we’re going to be describing two new areas of qualifying R&D expenditure that the Government announced will be added to the six existing categories, as of April 2023. This reform means that previously ineligible businesses may now access R&D Tax Relief, and that companies already claiming may see their claim size grow!
Chancellor Rishi Sunak’s Autumn Budget announcement back in November of 2021 further detailed guidelines first set out in the prior Spring Statement. Among these were two areas of R&D activity that were set to be added to HMRC’s description of qualifying R&D expenditure, for the purpose of R&D Tax Relief.
The first of these is cloud computing & data.
Cloud computing is the on-demand availability of computer system resources, such as computing power, without direct active management by the user. Large clouds often have functions distributed over multiple locations, each location being a data centre.
This new inclusion was put in place to better align the R&D Tax Relief scheme with the way modern businesses operate. During 2020, the adoption of cloud computing services spiked in the UK, largely due to the impact of COVID-19.
Reports showed that 51% of UK founders and senior decision makers believe investment in cloud computing “saved” their organisations during the pandemic, and 60% of respondents claimed that they planned to increase and scale their cloud usage for the following year.
Under the same umbrella, data costs for the purpose of R&D Tax Relief will include the use of third-party resources and services in the process of acquiring, analysing, and storing data.
Secondly, pure mathematics will qualify for R&D Tax Relief from April 2023.
To align the R&D Tax Credits initiative with the growing volume of R&D underpinned by mathematical advances, R&D Tax Relief will include pure mathematics as qualifying expenditure.
Chancellor Sunak explained the inclusion of pure mathematic expenditure; “this reform will support nascent sectors where the UK has a comparative advantage such as Artificial Intelligence, quantum computing and robotics while also supporting strong sectors such as manufacturing and design.”
What do these R&D Tax Relief reforms mean for innovation in the UK?
These two additional spending areas being included within R and D Tax Credits offers direct support for a wide range of IT-related research and development projects (such as Artificial Intelligence and quantum computing), as well as huge benefits to modern manufacturing which now relies largely on the use of data throughout design and innovation, including digitalisation and automation projects.
What’s more, the ability to reclaim R&D Tax Relief for expenditure related to third-party computing services makes the initiative more accessible for smaller companies that may previously have been excluded.
Existing categories of qualifying R&D expenditure
So, what are the existing six areas of qualifying R&D activity?
Under current legislation, there are six categories of qualifying R&D expenditure that determine how much R&D Tax Relief your business could reclaim.
These are:
Staffing
Subcontractors
Externally Provided Workers (EPWs)
Consumables
Software
Payments to the subject of clinical trials
Though we didn't go into detail regarding the above categories in this blog, we've previously covered each of of them in depth. If you’d like to learn more about the specific inclusions in any of these areas of qualifying R&D expenditure, use the links below to read our related blog posts:
👉🏼 Claiming R&D Tax Relief for Staffing Costs 👉🏼 Claiming R&D Tax Relief for Subcontractors and EPWs 👉🏼 Claiming R&D Tax Relief for Consumables 👉🏼 Claiming R&D Tax Relief for Software
*These are the updated figures in line with the new legislation announced in the April 2023 Spring Budget.