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Along with the previously announced changes, the Chancellor announced sweeping changes to R&D relief rates effective 1 April 2023. There is a substantial reduction in relief offered to smaller companies due to these rate changes, but there is an increase in relief offered to large companies as a result. Following the government’s clear statement of intent to support the tech sector, the government’s decision to widen the incentive will lead to new opportunities for tech innovators.

While R&D tax reliefs have long been a benefit for innovative UK companies, some barriers have prevented businesses from utilising AI, quantum computing, and pure mathematics to benefit from the schemes.

Currently, activities which relate to pure mathematics aren’t not eligible for inclusion in R&D claims. This changes from April 2023 and companies will be able to claim a proportion of costs relating to pure maths activities.

Currently, costs relating to cloud-based technology can’t be included in an R&D claim. From April 2023, cloud-based computing costs such as AWS will be eligible for inclusion.

HMRC’s decision to include licence payments for datasets is a positive move that should benefit tech companies, especially those operating in the AI and machine learning fields.

Pure Mathematics & R&D tax relief

By including activities seeking advances in pure mathematics, businesses will be able to claim with greater confidence. As pure math is most likely already linked to software development, translating those advances into software would be the primary goal of such projects in a commercial context. The line between the two is often blurry, so HMRC may have been able to search R&D claims without this update. Nevertheless, with the disambiguation of the definition, tech firms can be confident that the government wants them to be funded and that they have clear policy backing them.

Cloud computing costs & R&D tax relief

The cost of cloud computing isn’t marginal for businesses in the technology sector. Creating, maintaining, running, and storing machine learning (ML) and artificial intelligence (AI) solutions, training datasets, models, and simulations can be a huge overhead that is essentially unavoidable in quantum computing.
While many smaller companies may reconsider their costs if they still maintain their own servers, most of the sector will not be exposed to cloud computing as a result of this change. Nonetheless, firms will be able to reclaim some of these costs back, allowing them to redirect funds to other areas of R&D or invest in computer power to develop new products more rapidly and effectively.

Dataset costs & R&D tax relief

By including the purchase of data to be used in training datasets, for example, AI can be built and improved more affordably. HMRC has yet to clarify how these changes will be interpreted. Several of the proposed exclusions seem excessively restrictive, thereby limiting the genuine application of the benefit. In spite of HMRC’s desire to avoid overly broad categories due to the risk of abuse, it is essential that companies can claim relief for these costs confidently.

HMRC’s drive

HMRC is increasing its scrutiny of R&D claims
Despite the government’s commitment to assisting innovative tech firms, HMRC is focused on tackling errors and abuse in R&D tax relief claims, and penalties may be charged if errors are identified, making it crucial that claims are both correct and well-documented.
To ensure that the incentive isn’t misused, more claims are being reviewed than ever before. The R&D relief claim will require full disclosure to HMRC, making the claim process more onerous but more transparent.

No overseas R&D
R&D claims will no longer include subcontracted spending from outside the UK.
The aim of this is to bring more R&D activity to the UK and incentivise companies to move operations into the UK.

You must make your R&D claim online
It’s not just the scheme criteria that’s changing. HMRC will also update the way you need to submit your R&D claim from April 2023. Despite these changes, you should make sure that your R&D tax claims are prepared carefully following the introduction of any changes to the incentive. In your claim methodology, make sure you have a balanced and pragmatic approach to risk, as HMRC’s guidance and approach will evolve as they review more R&D claims.

Talk to the R&D Experts

Square Mile Accounting is a trusted adviser to tech companies in the UK, and we understand that R&D tax relief has the potential to boost UK business investment in R&D. As a tech innovator, if you are looking to claim significant amounts of money or are considering making your first R&D claim, we can help. You can also speak to us if you’d like to discuss how the changes affect your circumstances.

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