Have your say on the evolution of R&D tax incentives

HMRC consultation on qualifying R&D expenditure and activities

The Government and HMRC have issued a consultation document on evolving the defined categories of qualifying expenditure for the R&D Expenditure Credits (RDEC) and SME R&D Tax Relief regimes.

The consultation discusses the possibility of expanding qualifying expenditure to include data and cloud computing costs. The scope of the consultation also considers restrictions to currently allowable costs on Qualifying Indirect Activities (QIA) and routine work that contributes to R&D. The recognition of changes to the way IT software and services are provisioned and developed is welcomed, whilst the impact of any changes to eligible activities needs to be carefully considered by HMRC and Treasury.

It is important that HMRC hear from businesses across all sectors so that all of the expenditure relevant to driving innovation in the UK is considered to help ensure that the UK’s R&D relief is competitive with similar overseas R&D incentives.

The consultation document is available here.

If you would like to discuss these proposed changes, or to discuss the application of R&D tax relief to your business more broadly please get in touch via the contact section of our website or email

Further background to the consultation

The consultation invites businesses to comment generally on how the scope of qualifying expenditure for R&D tax credits could evolve to reflect modern trends in research and development. Specific questions are asked on data and cloud computing costs, as well as qualifying indirect activities and “routine” activities associated with undertaking R&D.

Data and cloud computing costs
While expenditure incurred on software used as part of R&D has always been a qualifying cost, there has been a trend away from licensing software to renting cloud services (which bundle together access to software and computing resources provisioned via virtualised environments). The current categories of qualifying expenditure do not incorporate the potentially significant expenditure incurred on wider cloud computing resources critical to supporting R&D across a range of industries. This can present challenges when identifying the costs related to allowable software expenditure and has led to a decrease in the costs that companies claim in respect of software.

Many businesses also incur expenditure on acquiring and processing data as part of undertaking R&D. For example, as part of building new or improved machine learning based systems, or to aid in discovery processes as part of R&D in scientific and engineering projects. Since data does not clearly meet the accepted tax definition of software or consumables, businesses can be limited in their ability to claim these costs, despite their potential contribution to R&D.

Qualifying indirect activities (QIAs) and “routine” activities
Paragraph 31 of the BEIS guidelines that define R&D for tax purposes includes a list of activities, known as qualifying indirect activities, which are claimable on the basis that they indirectly support R&D on qualifying projects. The list includes a broad range of activities, for example: maintaining research and development equipment (including computers), administrative, finance and personnel activities. A variety of approaches are taken by claimants to identify QIAs and link them to R&D projects. While additional clarity is always welcome, restricting or removing this category of activity may have a material impact on claims in sectors where there is a significant overhead in supporting R&D activities, facilities and personnel.

The concept of “routine” activities is not defined in the consultation document and it would be helpful for HMRC to provide clarification to aid business with their response to the consultation. Undertaking R&D involves a range of activities which may be considered “routine” when looked at in isolation, but which are vital to realising the innovation which R&D Tax incentives are intended to support.

Please note the deadline for making contributions has now closed.

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