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Qualifying costs for R&D tax relief – new consultation

10 August 2020

In the Spring Budget 2020, the Chancellor announced a review of certain costs commonly incurred as part of R&D projects which are currently outside the scope of R&D tax relief – namely data and cloud computing costs.

HM Treasury has now issued a consultation document requesting more information about these costs including examples of software and data costs used as part of R&D projects which cannot be claimed and evidence that widening the scope of R&D relief for these would result in more spend on R&D.

However, as well as reviewing data and cloud computing costs, the consultation also includes questions regarding qualifying indirect costs. These are costs which support R&D on projects, but don’t directly contribute to the R&D – for example, maintenance, security, administration and clerical activities for qualifying R&D projects.

BDO welcomes HM Treasury’s review of cloud computing costs and data. In many cases, the widening of the legislation here would reflect new business models used and the increasing role of data and analytics in undertaking R&D, as well as reflecting the types of costs eligible in other tax jurisdictions.

However, any changes made to qualifying indirect costs could affect even more R&D claims, because most companies have some elements of indirect time.  Whilst all R&D regimes examine these costs differently, the inclusion of these does reflect that the cost to a business in running an R&D project include more than just the costs directly attributable to the R&D work itself.  For example, France allows a fixed percentage of overheads to be allocated to different cost categories and Australia allows costs for ‘supporting R&D activities’ provided certain conditions are satisfied.  Moreover, until 2003 UK law relied upon an 80/20 rule whereby those staff qualifying at 80% were included at 100% and those staff below 20% were removed completely.  The key issue is that the UK rules are there to encourage good (qualifying) behaviours and any change to the indirect rules must ensure that unintended consequences are avoided through the impact assessment. 

BDO will respond to this latest consultation and we’re keen to reflect any relevant experiences of claims and comments, so please do get in touch with us to share your thoughts.

Read the HM Treasury consultation document.

For help and advice your R&D claim please get in touch with your usual BDO contact, Steven Levine or Katy Rabindran.