Research & Development tax relief

The measure

The government has announced a number of measures in relation to the research and development (R&D) tax relief regimes and the ongoing R&D reforms to come into effect in April 2023.

The government has reiterated its intention to expand qualifying expenditure to include data and cloud computing costs, and has now confirmed that cloud computing costs will also include all data storage costs.

The government has also announced that while its ambition is to refocus the reliefs towards activities carried out in the UK, it recognises that there are some cases where R&D activities need to be carried out overseas. The government will therefore legislate to allow overseas R&D expenditure where there are:

• Material factors required for the research that are not present in the UK (e.g. geography, environment, population); or
• Regulatory or other legal requirements that activities must take place outside of the UK (e.g. clinical trials).

The government recognises the growing volume of R&D being undertaken which is underpinned by pure mathematics and so has confirmed that that scope of the reliefs will be expanded to include all mathematics.

Finally, the government has announced that consideration will be given in the Autumn to increasing the generosity of the Research and Development Expenditure Credit (“RDEC”) regime to boost R&D investment in the UK and make the RDEC more internationally competitive.

The government is continuing the review of R&D tax reliefs, with further announcements to be made in the Autumn. 

Who will be affected?

The expansion of the categories of qualifying expenditure to include data, storage and cloud computing costs will benefit many companies, as there has been a significant move away from licensing software to using cloud services in recent years. Companies that incur expenditure on acquiring, processing and storing data as part of undertaking R&D will also benefit, including those engaged in data-heavy activities such as genomic sequencing, as the cost of storing vital data will now also be eligible for relief.

Companies that use overseas resources on their R&D projects will be affected by the refocus of the reliefs on activities carried out in the UK. However, allowing exemptions where R&D activities need to be carried out overseas due to regulatory or material factors will help mitigate the risk of claimants being adversely affected where there is no viable alternative to carrying out certain activities overseas.

The expansion of the scope of the reliefs to include mathematics will benefit claimants within sectors such as manufacturing and design, while also supporting sectors such as Artificial Intelligence, quantum computing and robotics.

Consideration of an increase in the rate of relief under RDEC will benefit all large companies claiming under this regime.

When will the measure come into effect?

It is intended for the following to be legislated for in a future Finance Bill and to take effect from April 2023:

• The extension of qualifying expenditure to include data, storage and cloud computing costs.
• The restriction of R&D activity carried out overseas to refocus the relief on activities carried out in the UK; and

The expansion of qualifying expenditure to include all mathematics.

Further announcements in respect of the potential increase of RDEC and wider review of the R&D regimes will be made in Autumn 2022.