The Government is reforming R&D tax relief, and has opened a consultation into the proposed changes. In the first of a three part series of blogs, Catax analyses what areas need a second look, starting with data licences and with overseas expenditure and advance notice of claims to follow.
The announcement in the last Autumn Statement that R&D tax relief qualifying costs would soon cover data and cloud computing was a welcome step and much needed.
This area is constantly evolving and has become increasingly important to innovating companies. Its introduction modernises the scheme, ensuring the legislation keeps pace with new technologies and trends.
Cloud computing regularly crops up in R&D claims when businesses need to rent remote machines as they require more computing power, or when they need more storage capacity. Data is also often required for R&D purposes such as for machine learning or artificial intelligence, among many other uses.
Businesses carrying out R&D regularly make licence payments to purchase datasets for their project. Meanwhile, data processing and software also come with associated costs.
As ever though, the devil is the detail. HMRC has since published its proposals in greater depth as part of a consultation, to which Catax has responded. There are a few problem areas that we think need a second look.
Under the proposals, licence payments for datasets would be excluded from relief if the client:
In Catax’s view, these exceptions are likely to render the inclusion of data licences unworkable because they will exclude costs that the core legislation appears in favour of including.
Let’s revisit the first exclusion, over the right to resell data.
It’s common for resale rights to form part of data licences. However, you might identify a need for raw data as a pivotal part of your project and not realise that a clause exists which allows you to resell it. This clause is even more likely to be missed if you have no intention of reselling the data at the outset.
If your company can show that the R&D activity could not have taken place without purchasing the dataset, then a right of resale over that data has no bearing on its original purpose. Yet you would not be allowed to claim.
Meanwhile, the exclusion of relief if you have the right to publish, share or communicate the raw data to a third party is similarly problematic.
It is possible that — when dealing with investors, clients, funders, partners, contractors and others — a company may need to share the data to prove a project’s validity or enter a tender process with third parties, who may never use the data. Given subcontractors are often involved in claims, the term ‘third party’ would, at the very least, need further definition so that the legislation only excluded those not involved in the R&D activity.
Finally, the third exception excludes the costs associated with data licences where there are ongoing rights of use, beyond the term of the R&D project. This, too, presents a number of difficulties.
It’s very common for R&D projects to have no defined end date and, for this reason, it is normal and perfectly reasonable for potential R&D claimants to seek data that has no restriction on ongoing use. They simply can’t say with certainty how their project will evolve.
If all the issues above can be catered for, then the expanded scope of the R&D tax relief scheme presents exciting opportunities for innovating companies.
Catax will continue to monitor the way the claims rules are evolving and awaits HMRC’s decisions with interest.