Consultation outcome

Research and Development (R&D) tax reliefs – draft guidance update

Updated 18 April 2023

1. Overseas

The previously announced restriction on some overseas expenditure will now come into effect from 1 April 2024 instead of 1 April 2023. This will allow the government to consider the interaction between this restriction and the design of a potential merged Research and Development (R&D) relief which has been consulted on recently.

2. Data licences and cloud computing services

CTA 09/S1125

For accounting periods starting on or after 1 April 2023 data licence and cloud computing services costs can be qualifying expenditure when employed in activities which directly contribute to the resolution of scientific or technological uncertainty.

Where data or cloud services are used for multiple purposes within the business HMRC will accept a reasonable apportionment between the use for qualifying R&D activities and the other uses. An example of reasonable apportionment would be one that was based on, such as staff hours used for qualifying R&D activities, number of licences used for qualifying R&D activities, a ratio of data storage for qualifying R&D activities to data storage for non-R&D activities.

It is important to keep evidence to support any apportionments. An example of a source of evidence would be a record that included details of accessing the data or service, the length of time accessed, and the reason for the access.

2.1. General exclusions

CTA09/S1126ZA (1)(a)

If the business has a contractual right to sell data onward, it will not be able to claim expenditure on the licence or service costs. This is to prevent R&D relief being claimed on costs that the business can recoup. In some cases, such as data aggregation, businesses will enrich data or cloud service before packaging them up for resale. If the transformation is so significant that the initial inputs can no longer be identified, then the general exclusion will not apply. When the initial inputs can still be identified then the ‘value added’ will be an important factor in deciding whether the general exclusion will apply.

Example 1

A company has developed a new algorithm which represents an advance in technology. It obtains a data licence to access financial market data and tests the new algorithm by using it to analyse the data. The original data and the analysis are included in a package of information which is sold to customers.

If the original data is included only to facilitate understanding of the analytic output, then it is likely that the general exclusion will not apply. However, if the original data makes up the substance of the package of information and the analytic output is secondary then the general exclusion will still apply.

CTA09/S1126ZA (1)(b)

If the business has a contractual right to publish, share or otherwise communicate data with a third party it will not be able to claim expenditure on the licence or service costs. This is to prevent R&D relief being claimed on costs that the business can recoup.

An exception is made where the data is published, shared or communicated with a third party for the purposes of communications reasonably necessary for, or incidental to, the relevant R&D.

Intra-group communications will be covered by this exemption so long as they are reasonably necessary for, or incidental to, the relevant R&D.

Where research is published in a peer reviewed journal or similar, the inclusion of data will be treated as communications reasonably necessary for, or incidental to, the relevant R&D.

Example 2

Company A and Company B are collaborating on delivery of a large infrastructure project. Company A is engaged in R&D activities to develop a new material that outperforms existing materials relative to local weather conditions, while Company B leads on site management. Company A has incurred expenditure on a climate forecasting tool. At quarterly meetings Company A shares readouts from the climate forecasting tool with Company B.

If the purpose of sharing the readouts with Company B is so that a material testing strategy can be agreed, then the general exclusion will not apply as the data was communicated in support of Company A’s R&D activities.

CTA09/S1126ZA (2)

Qualifying Indirect Activities (QIAs) are defined in the DSIT Guidelines as activities which form part of a project but do not directly contribute to the resolution of the scientific or technological uncertainty [CIRD81900].

QIAs are not treated as attributable to relevant research and development when they are incurred in relation to data licence or cloud computing services.

Example 3

A company purchased a Software-as-a-Service (SaaS) cloud-service to manage human resources (such as Human Capital Management system). The SaaS software is used by HR teams who are involved in QIAs (such as taking on staff that perform R&D). Whilst some of the HR team effort may qualify for R&D as a qualifying indirect activity, the software-as-a-service they used would not qualify.

2.2. Data licences

CTA09/S1125 (1A)

A data licence is a licence to access and use a collection of digital data. This includes data sets which could be licenced in various ways (such as data feed subscription or data as a service). Provided that the business does not obtain ownership of the data it is likely that the costs will be a revenue expense.

As the R&D schemes do not relieve capital costs, most purchases of data will not be qualifying expenditure.

Data that has been gathered by the business, rather than licenced, is not qualifying expenditure. However, the staff costs of gathering the data would likely be qualifying expenditure under the staff costs category [CIRD83000].

2.3. Cloud computing

CTA09/S1125 (1B)

Cloud computing services include the provision of, access to, and maintenance of, remote data storage and hardware facilities and operating systems and software platforms.

If a business creates its own cloud computer infrastructure, the set up costs will not be qualifying expenditure under this section and may be capital expenditure [BIM 35822]. Some of the costs incurred in operating these facilities may be qualifying expenditure under other costs categories, such as staff costs [CIRD83000] or software [CIRD82500].

2.4. Points to note

As data licence and cloud computing service costs are only qualifying expenditure for accounting periods starting on or after 1 April 2023 it is important to check the date of the initial expenditure when releasing work in progress to the Corporation Tax return. The tax rules applicable to the work in progress expenditure are the rules that were in force when the expenditure was originally incurred [BIM33020].

3. Claim Notification

Tell HMRC that you’re planning to claim Research and Development (R&D) tax relief

3.1. CTA 09 Part 3 Chapter 6A

For accounting periods starting on or after 1 April 2023 some customers will need to submit a Claim Notification form for their R&D claim to be valid.

Customers need to supply a Claim Notification if:

• you’re claiming for the first time

• you’ve claimed for the previous accounting period, but you did not submit that claim until after the last date of the claim notification period (the claim notification period ends 6 months after the end of the period of account)

• your last claim was made more than 3 years before the last date of the claim notification period

Time limits

The earliest date that a Claim Notification form can be submitted is on the first date of the period of account to which the claim relates.

The latest date that you can submit the claim notification form is 6 months after the end of the period of account that the claim relates to.

If you do not submit it by this deadline, your claim will not be valid.

The Claim Notification form can be accessed on GOV.UK.

The Claim Notification is made for a period of account and will cover any accounting periods that fall within that period of account. This means that if a company’s accounting period changes, or they decide not to claim until a later account period, they may need to submit a new Claim Notification form.

Information required

To complete the claim notification form you will need to enter the following details:

• the company’s Unique Tax Reference (UTR), this must match the one shown in your Company Tax Return

• the main senior internal R&D contact in the company who is responsible for the R&D claim, for example a company director

• the contact details of any agent involved in the R&D claim

• the accounting period start and end date for which you’re claiming the tax relief or expenditure credit, this must match the one shown in your Company Tax Return

• the period of account start and end date

• a summary of the high-level planned activities, for example if you’ve developed software what it will be used for to show that the project meets the standard definition of R&D – you do not need to include evidence on the form, but you will need to provide further information on the Additional Information form

Example 1

A company submits an R&D claim on 1 April 2022. The customer next looks to submit an R&D claim on 1 January 2025. As they have submitted a claim in one of the last 3 calendar years, they do not need to submit a Claim Notification

Note that if a company makes its R&D claim before the deadline for submitting a Claim Notification, they do not have to also submit a Claim Notification form.

Example 2

A company has a period of account that ends on 5 September 2023. The deadline for submitting the Claim Notification is 5 March 2024. If the customer submits their R&D claim on 4 February 2024 they do not also have to submit a Claim Notification.

Example 3

A company has a 15 month period of account which runs from 1 January 2024 to 31 March 2025. The first accounting period is 1 January 2024 to 31 December 2024. The start of the second accounting period is 1 January 2024 to 31 March 2025. The claim notification form must be submitted between 1 January 2024 to 30 September 2025.

4. Mathematics

The definition of R&D for tax purposes is given in the DSIT guidelines.

Prior to 1 April 2023 there was a limitation potentially preventing claims for advances in mathematics itself. This meant that it was unclear whether activities relating to pure mathematics met the definition and whether tax relief was available.

The DSIT guidelines have been updated to make clear that activities relating to pure mathematics now meet the definition of R&D for tax purposes and are potentially eligible for R&D tax reliefs for accounting periods beginning on or after 1 April 2023.

Pure mathematics involves the exploration of new mathematical concepts, the development of new theories and techniques and the discovery of new mathematical relationships and patterns. This can involve the development of new mathematical models, the study of mathematical structures and symmetries, and the exploration of the foundations of mathematics itself.

Example

Elliptic Curves are a specific example of algebraic geometry which has a wide range of applications in fields such as physics, computer science and engineering.

Elliptic Curves are a type of mathematical object that can be used in cryptography. If a researcher is developing a new algorithm for computing with elliptic curves to solve complex mathematical problems this would be acceptable as an activity relating to pure maths.

As with other areas of R&D, a technical narrative that details the mathematical advances to HMRC should provide a clear and concise description of the research problem, the mathematical concepts and techniques used to address it, and the results sought and their significance.

5. Additional Information

5.1. FA98/Sch 18 Part 15A Para 83EA

From 1 August 2023 in order to be valid all claims for both R&D tax relief and Research and Development Expenditure Credit must be submitted with an Additional Information form.

The Additional Information form and instructions for completing it can be accessed on GOV.UK.

Providing extra information to HMRC

Extra information, for example supporting reports, can still be provided to HMRC by attaching them to the Company Tax Return. However, providing an R&D report and then inserting language into the Additional Information form such as ‘see R&D report for more detail’ would not meet the additional information requirements and would likely lead to the form being flagged for further investigation.

Group Companies

The requirement to provide an Additional Information form applies at entity level so where multiple members of a group each submit an R&D claim, they will each have to submit an Additional Information form. If the companies work jointly on projects, it may be appropriate to duplicate some responses across forms.

Projects spanning multiple years

The requirement to provide an Additional Information form applies to the individual R&D claim so customers will have to submit a new Additional Information form for each year that they claim R&D reliefs. If a project spans multiple years, it may be appropriate to duplicate some responses across forms, however inserting language such as ‘see previous form for more detail’ would not meet the additional information requirements and would likely lead to the form being flagged for further investigation.

Large Business directorate customers with a Customer Compliance Manager (CCM) should contact their CCM to agree the level of information required before submitting the Additional Information form.

6. If you’re a large business customer

Submit detailed information before you claim Research and Development (R&D) tax relief.

For information on how HMRC deals with expenditure credit claims for large business customers, read CIRD85100 Large Business Practice Notes in the Corporate Intangibles Research and Development Manual. [This link is for a draft page]

All companies are required to complete the Additional Information form to meet the legislative and validation requirements. This is a requirement for an RDEC claim to be made and should build upon and/or utilise information that is available to the company as part of existing claim preparation processes.

There is no pre-determined expectation of the amount of information required to be provided for any individual project when completing the Additional Information form. What you provide should be sufficient to explain to HMRC why the project qualifies for R&D relief/RDEC. This is explained in the section below to help you. Where we do have questions about your projects, we can write to you for further information.

As all companies are required to complete the Additional Information form, CCMs do not have any discretion to disregard the submission of the form, nor the number of projects that information must be provided for.

CCMs with support of R&D Specialists within the Large Business directorate may agree an approach to the amount of detail which is provided that takes account of HMRC’s knowledge of a group’s R&D activities and claim preparation process. For example, information could be provided as bullet points where details of the project have been discussed with HMRC in a pre-filing meeting or the approach to identifying R&D has previously been agreed by HMRC.

Where a project extends across multiple claim periods you can reuse the text box entries from previous Additional Information forms, updated where necessary if the project uncertainties or activities have changed.

You can continue to send us a separate R&D report if it contains further supporting details about your R&D projects, such as:

• the claim methodology
• use of sampling
• details of the competent professionals

These further details can help HMRC understand if the correct methodology has been used when compiling a claim.

You can submit the separate R&D report either:

• by email, using one of the contact us email addresses – copying in your Customer Compliance Manager
• online, when you complete your Company Tax Return

If you have any questions relating to the Additional Information form or R&D report, you can contact the Large Business directorate using the relevant contact us email address, copying in your CCM.