Updated Eligibility for R&D Tax Credits
The R&D tax credit scheme has been expanded to include two new categories of eligible costs – cloud computing and dataset purchases. This change came into effect in the Finance Act 2023, and represents an important update that will benefit many companies undertaking software and AI-related R&D projects.
Background
Prior to this change, HMRC did not consider cloud computing costs or dataset purchases to be eligible R&D expenditures. The reasoning was that these were viewed as machinery/server rental costs rather than direct software consumption. This created challenges for companies relying heavily on cloud infrastructure and external datasets to power their R&D activities.
After industry feedback and a government consultation, the rules have now been updated to explicitly include these cost categories. The change recognises the modern reality that many R&D projects, especially in software and emerging technologies, are heavily dependent on cloud-based resources and external data sources.
Practical Implications
The new rules allow companies to claim R&D tax credits on eligible costs for cloud computing services (e.g. using AWS, Azure, GCP) as well as purchases of large datasets required for their R&D projects. This can provide a significant boost to the total R&D expenditure that can be claimed.
However, there is an important caveat – the change only applies for accounting periods starting on or after April 1, 2023. This means that companies with non-March year-ends may miss out on claiming these new eligible costs for a full 12-month period.
| Year End | Start | End | Days “Lost” | First Claim Year |
|---|---|---|---|---|
| Apr-23 | 01/05/2022 | 30/04/2023 | 30 | 30/04/2024 |
| May-23 | 01/06/2022 | 31/05/2023 | 61 | 31/05/2024 |
| Jun-23 | 01/07/2022 | 30/06/2023 | 91 | 30/06/2024 |
| Jul-23 | 01/08/2022 | 31/07/2023 | 122 | 31/07/2024 |
| Aug-23 | 01/09/2022 | 31/08/2023 | 153 | 31/08/2024 |
| Sep-23 | 01/10/2022 | 30/09/2023 | 183 | 30/09/2024 |
| Oct-23 | 01/11/2022 | 31/10/2023 | 214 | 31/10/2024 |
| Nov-23 | 01/12/2022 | 30/11/2023 | 244 | 30/11/2024 |
| Dec-23 | 01/01/2023 | 31/12/2023 | 275 | 31/12/2024 |
| Jan-24 | 01/02/2023 | 31/01/2024 | 306 | 31/01/2025 |
| Feb-24 | 01/03/2023 | 29/02/2024 | 335 | 28/02/2025 |
| Mar-24 | 01/04/2023 | 31/03/2024 | – | – |
Strategies for Maximising Claims
While the delayed effective date is disappointing, there are some steps companies can take to optimise their R&D tax credit claims:
- Carefully review invoices and contracts to identify the portion of cloud/dataset costs that are directly tied to eligible R&D activities. Documentation is key, as HMRC may scrutinise these claims.
- Consider whether it makes sense to adjust the company’s year-end to March, in order to align with the April 1st effective date and maximise the eligible period.
- Work closely with tax advisors to ensure proper categorisation and documentation of these new eligible cost types, as HMRC guidance and interpretations continue to evolve.
The inclusion of cloud computing and dataset purchases as eligible R&D expenditures is an important step forward, but companies will need to navigate the practical challenges to fully benefit. Proactive planning and robust recordkeeping will be essential to successfully claiming these new cost categories.
If you would like to find out how we can help please contact Jamie McLellan, Senior R&D Manager, at jamie.mclellan@ballardsllp.com or on 01905 975688.
Disclaimer: This insight does not constitute financial or legal advice. All businesses have different considerations, and they should contact a professional before acting upon any of the information contained in this insight.
