Potential Changes to Qualifying Costs for Research and Development Tax Relief

Following on from the Spring Budget 2020, the Government has announced that they are now consulting on the eligible expenditure that can be included in Research and Development (“R&D”) tax credit claims. The last formal consultation on the qualifying cost categories for R&D was published in November 2010 and the Government feels that now is the right time to reassess this area of the relief.

R&D tax relief is a government initiative to support businesses investing in innovative activities. The qualifying cost categories for the relief currently include employee costs; subcontractor costs; externally provided workers and consumables and software. In trying to ensure the relief is developed, the Government are seeking views from R&D tax relief claimants and other stakeholders on the scope of costs eligible for tax credits. They are consulting on how the scope of qualifying expenditure for R&D tax credits ought to evolve for credits to remain well-targeted and reflect modern trends in R&D.

The Government is particularly interested in views on whether R&D costs for data and cloud computing should qualify for relief to better reflect modern R&D practices. Examples of these costs include generating, processing or analysing datasets and also cloud computing packages that will include the use of software, storage rental and processor running time.

By expanding the scope of qualifying costs for R&D tax relief, the Government understand that this will make claims more complex – the more cost categories there are, the more rules required to define them. In addition, an extension to the eligible expenditure will increase the cost to the exchequer. The Government are therefore keen to highlight that where suggestions are made for additional qualifying costs for R&D tax relief, they identify where cost savings could be made by restricting relief in other areas. For example, they are looking to consult on whether qualifying indirect activities are genuinely contributing to innovation or if relief could be given in other areas that will advance R&D.

The consultation will close on 13 October 2020 and AAB would welcome views from businesses where this is relevant.

AAB is here to help you establish whether your company qualifies for Research and Development tax relief, work with you to prepare a claim in accordance with the legislation and assist you with measures to help maximise the value of your claim.

If you would like to find out more about our R&D tax relief service, please contact Derek Gemmell, Corporate Tax Partner at AAB