Consultation outcome

Research and Development (R&D) tax reliefs - draft guidance

Updated 18 April 2023

This draft guidance is being published by HMRC for comment. No action should be taken based on it.

Please provide any comments by 28 February 2023 to rdtaxreliefdraftguidance2022@hmrc.gov.uk.

References to legislation in this document are to Corporation Tax Act (CTA) 2009, as it would be amended by draft legislation published in July 2022. This draft guidance should be read alongside that legislation.

Final legislation will be included in the Finance Bill in 2023. As the final form of that legislation may differ from the published draft, any final guidance may change from that in this document.

1. Overseas expenditure

For accounting periods beginning on or after 1 April 2023, for both the small or medium enterprise (SME) research and development (R&D) tax relief and the R&D Expenditure Credit (RDEC), to be qualifying expenditure, expenditure on payments to subcontractors is required to be UK expenditure, or to be qualifying overseas expenditure (CTA09/1138A).

This condition applies to the activities of the subcontractor, ie the person being paid to carry out the work.

For the same periods, to be qualifying expenditure, expenditure on payments for externally provided workers (EPWs) must be subject to PAYE and National Insurance contributions (NICs), unless it is qualifying overseas expenditure.

1.1 UK expenditure

UK expenditure is that which is attributable to relevant R&D undertaken in the UK.

This will involve the activities which the subcontractor is undertaking and which are part of the R&D project actually taking place in the UK.

So for example, employees of the subcontractor engaged in R&D activities will be carrying out their duties in the UK. Consumable items used by the subcontractor will be used in R&D in the UK (although they may be sourced from elsewhere). Software, data and cloud services used by the subcontractor will be employed for R&D activities undertaken by workers in the UK (although they, too, may be sourced elsewhere).

To the extent that the condition is partially met, with some activity taking place in the UK and some not, costs should be apportioned to the UK element of the activity on a just and reasonable basis

1.2 Qualifying overseas expenditure

Qualifying overseas expenditure (QOE) is expenditure on R&D undertaken outside the UK, where particular factors apply. There are 3 factors. They must all apply for the expenditure to be QOE.

• the first factor is that conditions necessary for the R&D are not present in the UK
• the second is that the conditions are present in the location where the R&D is undertaken
• the third factor is that it would be wholly unreasonable to replicate the conditions in the UK

For example, if the R&D involved placing sensors on active volcanoes, this clearly requires a condition (the presence of a volcano) that is not present in the UK, and one which it would be wholly unreasonable to replicate. And it is a condition that exists in places outside the UK. So this activity would be QOE if undertaken in a location where the necessary conditions arise.

Wholly unreasonable

Whether it is wholly unreasonable to replicate the conditions in the UK will depend upon the R&D, the circumstances of the company and the reason for undertaking the work abroad.

For example, suppose that the company wishes to carry on destructive testing of its product, using a commercial testing lab (to which the work would be subcontracted). If such facilities exist both in the UK and abroad, the activity would not qualify if undertaken outside the UK. If they do not exist in the UK, the question is whether the company (not somebody else) can reasonably replicate them.

If the company’s focus is R&D, design and production, it might not have the expertise to do this, or it may not be capable of effectively owning and running a facility that might see little use. It would be wholly unreasonable for the company to do this. If on the other hand the company or a third-party already operates similar facilities in the UK which could be easily adapted, it would be reasonable to expect it to do so, and the condition would not apply.

It may be that there is time pressure, requiring use of a facility abroad which could be replicated in the UK, but would take too long, or that UK facilities are available, but are fully booked on the required timescale.

The conditions

The legislation does not include an exhaustive list of the sorts of condition that may be relevant.

Geographical, environmental and social conditions

The legislation does state that these include geographical, environmental and social conditions. These are objective features of the physical world (whether natural in origin or the result of human activity) – for example the presence of a volcano, as mentioned above.

HMRC’s view is that this includes:

• medical factors such as incidence of a disease or availability of volunteers to trial a drug or other medical treatment
• animal or plant distribution
• the presence of machinery or facilities to which a company may require access

Other geographical, environmental and social conditions may also be relevant.

1.3 Legal or regulatory requirements

The legislation also states that legal or regulatory requirements may be relevant.

HMRC’s view is that this includes explicit legislative requirements (such as that activities must take place in a particular country or according to recognised regulatory principles which do not obtain in the UK) whether set out in national legislation, international agreements or treaties or elsewhere.

HMRC’s view is that this also includes the requirements and decisions of regulatory bodies (so for example, if testing of a drug must be done according to a method agreed by a regulatory body and that body decides that activity must take place in a particular country, or imposes requirements that make that necessary, then this is a regulatory requirement, even if it is not stated somewhere in legislation).

However, HMRC would expect to see clear, independent evidence that this was the case – for example correspondence from the regulatory body.

Where it is necessary to carry out one or more activities of the R&D project outside the UK this does not mean that other activities of the project meet the conditions.

Excluded factors

Two factors are excluded from meeting the conditions. These are cost, and availability of workers.

Cost will often be a factor in deciding where work is to take place. Where it is the only or main factor, it will not justify the activity being QOE. Where cost is a factor however it will often not be the only one. For example, if time pressures mean that R&D cannot wait until a new facility is developed in the UK, the theoretical possibility that – at great cost – that facility might be developed, allowing the activity to take place in the UK, will not prevent the expenditure being QOE.

Similarly, if availability of workers is the only, or main reason, for carrying out work abroad it will not justify the activity being QOE.

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 different functions. An example of reasonable apportionment would be one that was based on e.g., staff hours used, number of licences used, a ratio of R&D data storage to non-R&D data storage.

It is important to keep evidence to support any apportionments. A strong source of evidence would be a real-time record that included detail of the person 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, e.g., 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.

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 materials 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 BEIS 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.

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. Provided that the licensee doesn’t obtain ownership of the data it is likely that the costs of the licence will be a revenue expense. As the R&D regime does 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 operates its own cloud computer services, 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, e.g., staff costs [CIRD83000] or software [CIRD82500].

2.4 Points to note

As data licence and loud computing services 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.

3. Claim Notification

3.1 CTA 09 Part 3 Chapter 6A

FA98 Sch 18 Part 9A para 83EB

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 who need to supply a Claim Notification are:

• first time R&D claimants
• R&D claimants who have not made an R&D claim in any of the previous 3 calendar years

Example 1: A customer 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 customer makes its R&D claim before the deadline for submitting a Claim Notification (see Time limits below), they do not have to also submit a Claim Notification form.

Example 2: A customer 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.

The Claim Notification form can be accessed from GOV.UK [note: the form will be live in April 2023].

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 customer’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.

Time limits

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

The latest date for submitting the Claim Notification form is 6 months after the end of the period of account that includes the relevant accounting period.

Information required

• the Unique Tax Reference (UTR) number of the company - this must be correct and correlate with that on your CT600
• contact details of main internal R&D contact at the company - this is the person from the business responsible for the claim
• contact details of any agent involved in the R&D claim
• agent reference number (if you have one)
• period of account start and end dates which must correlate with your tax computations
• accounting period start and end dates of the accounting period claiming R&D for only - again, this must be correct and align with that on the CT600

4. Mathematics

The definition of R&D for tax purposes is given in the BEIS 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 unavailable.

From 1 April 2023 the BEIS guidelines have been updated to make clear that activities relating to pure mathematics now meet the definition and are eligible for R&D tax reliefs.

5. Additional information

5.1 FA98/Sch 18 Part 15A Para 83EA

For accounting periods starting on or after 1 April 2023 for an R&D tax relief claim to be valid a customer must submit an Additional Information form.

The Additional Information form can be accessed on GOV.UK [note: the form will be live in April 2023].

Time limits

The form should be submitted before, or at the same time as, the claim

Information required

The following information will need to be provided:

• the Unique Tax Reference (UTR) number of the company
• employer PAYE Reference number
• VAT Number
• contact details of main internal R&D contact at the company - this is the person from the business responsible for the claim
• main type of business carried out (SIC code)
• if completed by an agent, the agent reference number (if you have one)
• contact details of any agent working on the claim
• accounting period start and end dates.
• qualifying expenditure under the following categories
  • employee costs
  • externally provided workers
  • contracted out R&D
  • software
  • consumable Items
  • payments to participants of a clinical trial
  • data licence (for accounting periods starting on or after 1 April 2023)
  • cloud computing services (for accounting periods starting on or after 1 April 2023)
  • contributions to independent R&D costs (RDEC only)
• amount of the above that is qualifying indirect activities (QIAs)
• number of projects claimed for
• descriptions of the projects under 5 headings:
  • What is the main field of science or technology
  • What was the baseline level of science or technology that you planned to advance?
  • What advance in that scientific or technical knowledge did you aim to achieve?
  • What scientific or technological uncertainties did you face?
  • How did your project seek to overcome these uncertainties?
• for 1 to 3 projects the company will need to describe all projects, covering 100% of the qualifying expenditure
• for 4 to 10 projects it will need to describe projects that account for 50% of the total expenditure, with a minimum of 3 projects described
• for 10 to 100 plus projects, it will need to describe projects that account for 50% of the total expenditure, with a minimum of 3 projects described - however, if the qualifying expenditure is split across multiple smaller projects, describe the 10 largest
• number of EPWs who worked on the projects
• PAYE scheme reference for those EPWs

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