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BUSINESS

R&D Tax: Important Exemptions and Upcoming Changes for the IT & Software Industry

Published On :

By Michael Eghan, IT Sector Lead, Ayming

Following the announcement in the Autumn Budget 2021, some changes were made to the R&D tax relief scheme, including those specific to the IT and software sector.

Historically, certain elements prevalent within the sector were not claimable, however it was announced that this will change under the updated scheme, with the following categories brought into scope and qualifying for R&D expenditure relief as of 1 April 2023:

  • Licence payments for datasets
  • Cloud computing costs that can be attributed to computation, data processing and software

The government invited these changes in the hope that the tax relief better incentives cutting-edge R&D activities which rely on vast amounts of data that are analysed and processed through cloud technology.

Sub-contracting and driving innovation towards the UK

Many IT & Software companies heavily rely on sub-contractors to conduct their research and development, namely due to the cost effectiveness it provides to UK businesses. The autumn budget 2021 proposed to limit tax relief for payments to subcontractors and activities that take place in the UK.

This new change by the government is intended to encourage UK companies to employ skilled staff and to conduct research and development activities within the UK, which will inevitably improve skills and benefit the UK from a tax perspective.

In contrast, where companies claim for expenditure on externally provided works (EPWs), these will in future be restricted to EPWs who are employed in the UK and contribute to PAYE/NIC.

Compliance and ethical R&D claims

Compliance and regulation have become a key focus for HMRC to protect the integrity of the R&D tax relief scheme. The autumn budget also proposed administrative changes that will ensure compliance of future claims, meaning companies will need to provide more information when processing claims. All claims will be digitally filed and the intention to claim must be notified by either the company or its appointed advisor.

Here are some more of the proposed changes:

As we are currently aware, the digital claim submissions will be put in place from April 2023, but it is currently unclear when the other compliance requirements will take effect.

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